-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BK1pM4LOU0N6dp7zz9vlfVq68LV17DMTMl2VNAjzSGsMihYJnNJhmQgyRTAncClR 04lWSmpuS1P8Ag6ROnRsaw== 0000950117-02-001185.txt : 20020513 0000950117-02-001185.hdr.sgml : 20020513 ACCESSION NUMBER: 0000950117-02-001185 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08940 FILM NUMBER: 02644209 BUSINESS ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 9176635000 MAIL ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 a32647.txt PHILIP MORRIS COMPANIES FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8940 Philip Morris Companies Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 13-3260245 - --------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 120 Park Avenue, New York, New York 10017 - --------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (917) 663-5000 ------------------------------ - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At April 30, 2002, there were 2,139,554,033 shares outstanding of the registrant's common stock, par value $0.33 1/3 per share. PHILIP MORRIS COMPANIES INC. TABLE OF CONTENTS
Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001 3 - 4 Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2002 and 2001 5 Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2001 and the Three Months Ended March 31, 2002 6 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 7 - 8 Notes to Condensed Consolidated Financial Statements 9 - 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 - 43 PART II - OTHER INFORMATION Item 1. Legal Proceedings 44 Item 4. Submission of Matters to a Vote of Security Holders 44 Item 6. Exhibits and Reports on Form 8-K 45 Signature 46
-2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions of dollars) (Unaudited)
March 31, December 31, 2002 2001 --------- ------------ ASSETS Consumer products Cash and cash equivalents $ 383 $ 453 Receivables (less allowances of $170 and $193) 5,275 5,148 Inventories: Leaf tobacco 3,567 3,827 Other raw materials 2,057 1,909 Finished product 3,251 3,187 ------- ------- 8,875 8,923 Other current assets 1,936 2,751 ------- ------- Total current assets 16,469 17,275 Property, plant and equipment, at cost 25,735 25,625 Less accumulated depreciation 10,679 10,488 ------- ------- 15,056 15,137 Goodwill and other intangible assets, net 37,485 37,548 Other assets 5,884 6,144 ------- ------- Total consumer products assets 74,894 76,104 Financial services Finance assets, net 8,472 8,691 Other assets 178 173 ------- ------- Total financial services assets 8,650 8,864 ------- ------- TOTAL ASSETS $83,544 $84,968 ======= =======
See notes to condensed consolidated financial statements. Continued -3- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Continued) (in millions of dollars, except per share data) (Unaudited)
March 31, December 31, 2002 2001 --------- ------------ LIABILITIES Consumer products Short-term borrowings $ 1,614 $ 997 Current portion of long-term debt 1,897 1,942 Accounts payable 2,927 3,600 Accrued liabilities: Marketing 2,717 2,794 Taxes, except income taxes 1,610 1,654 Employment costs 744 1,192 Settlement charges 1,733 3,210 Other 2,417 2,480 Income taxes 1,009 1,021 Dividends payable 1,246 1,251 -------- -------- Total current liabilities 17,914 20,141 Long-term debt 17,836 17,159 Deferred income taxes 5,227 5,238 Accrued postretirement health care costs 3,371 3,315 Minority interest 4,038 4,013 Other liabilities 7,912 7,796 -------- -------- Total consumer products liabilities 56,298 57,662 Financial services Short-term borrowings 512 Long-term debt 1,935 1,492 Deferred income taxes 5,231 5,246 Other liabilities 398 436 -------- -------- Total financial services liabilities 7,564 7,686 -------- -------- Total liabilities 63,862 65,348 Contingencies (Note 7) STOCKHOLDERS' EQUITY Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) 935 935 Additional paid-in capital 4,457 4,503 Earnings reinvested in the business 38,454 37,269 Accumulated other comprehensive losses (including currency translation of $3,493 and $3,238) (3,585) (3,373) -------- -------- 40,261 39,334 Less cost of repurchased stock (665,529,324 and 653,458,100 shares) (20,579) (19,714) -------- -------- Total stockholders' equity 19,682 19,620 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $83,544 $84,968 ======= =======
See notes to condensed consolidated financial statements. -4- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (in millions of dollars, except per share data) (Unaudited)
For the Three Months Ended March 31, --------------------------- 2002 2001 --------- -------- Net revenues $20,535 $19,959 Cost of sales 8,532 8,370 Excise taxes on products 4,575 4,433 ------- ------- Gross profit 7,428 7,156 Marketing, administration and research costs 3,255 3,536 Amortization of intangibles 2 253 ------- ------- Operating income 4,171 3,367 Interest and other debt expense, net 293 451 ------- ------- Earnings before income taxes, minority interest and cumulative effect of accounting change 3,878 2,916 Provision for income taxes 1,376 1,095 ------- ------- Earnings before minority interest and cumulative effect of accounting change 2,502 1,821 Minority interest in earnings 137 35 ------- ------- Earnings before cumulative effect of accounting change 2,365 1,786 Cumulative effect of accounting change (6) ------- ------- Net earnings $ 2,365 $ 1,780 ======= ======= Per share data: Basic earnings per share before cumulative effect of accounting change $1.10 $0.81 Cumulative effect of accounting change ----- ----- Basic earnings per share $1.10 $0.81 ===== ===== Diluted earnings per share before cumulative effect of accounting change $1.09 $0.80 Cumulative effect of accounting change ----- ----- Diluted earnings per share $1.09 $0.80 ===== ===== Dividends declared $0.58 $0.53 ===== =====
See notes to condensed consolidated financial statements. -5- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2001 and the Three Months Ended March 31, 2002 (in millions of dollars, except per share data) (Unaudited)
Accumulated Other Comprehensive Losses ----------------------------- Addi- Earnings Total tional Reinvested Currency Cost of Stock- Common Paid-in in the Translation Repurchased holders' Stock Capital Business Adjustments Other Total Stock Equity ----- ------- -------- ----------- ----- ----- ----- ------ Balances, January 1, 2001 $935 $ -- $33,481 $(2,864) $(86) $(2,950) $(16,461) $15,005 Comprehensive earnings: Net earnings 8,560 8,560 Other comprehensive losses, net of income taxes: Currency translation adjustments (753) (753) (753) Additional minimum pension liability (89) (89) (89) Change in fair value of derivatives accounted for as hedges 33 33 33 ------- Total other comprehensive losses (809) ------- Total comprehensive earnings 7,751 ------- Exercise of stock options and issuance of other stock awards 138 70 747 955 Cash dividends declared ($2.22 per share) (4,842) (4,842) Stock repurchased (4,000) (4,000) Sale of Kraft Foods Inc. common stock 4,365 379 7 386 4,751 ---- ------ ------- ------- ---- ------- -------- ------- Balances, December 31, 2001 935 4,503 37,269 (3,238) (135) (3,373) (19,714) 19,620 Comprehensive earnings: Net earnings 2,365 2,365 Other comprehensive losses, net of income taxes: Currency translation adjustments (255) (255) (255) Additional minimum pension liability 1 1 1 Change in fair value of derivatives accounted for as hedges 42 42 42 ------- Total other comprehensive losses (212) ------- Total comprehensive earnings 2,153 ------- Exercise of stock options and issuance of other stock awards (46) 63 235 252 Cash dividends declared ($0.58 per share) (1,243) (1,243) Stock repurchased (1,100) (1,100) ---- ------ ------- ------- ---- ------- -------- ------- Balances, March 31, 2002 $935 $4,457 $38,454 $(3,493) $(92) $(3,585) $(20,579) $19,682 ==== ====== ======= ======= ==== ======= ======== =======
Total comprehensive earnings, which represent net earnings and the change in fair value of derivatives accounted for as hedges, partially offset by currency translation adjustments, were $1,635 million for the quarter ended March 31, 2001. See notes to condensed consolidated financial statements. -6- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in millions of dollars) (Unaudited)
For the Three Months Ended March 31, ---------------------------- 2002 2001 ------ ------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net earnings - Consumer products $ 2,322 $ 1,741 - Financial services 43 39 ------ ------ Net earnings 2,365 1,780 Adjustments to reconcile net earnings to operating cash flows: Consumer products Cumulative effect of accounting change 6 Depreciation and amortization 334 588 Deferred income tax provision 736 479 Litigation related expenses 500 Loss on sale of a North American food factory and integration costs 27 29 Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net (322) (220) Inventories 66 (219) Accounts payable (757) (952) Income taxes 22 (22) Accrued liabilities and other current assets (1,774) (1,448) Other 298 (77) Financial services Deferred income tax benefit (15) (7) Other 120 120 ------ ------ Net cash provided by operating activities 1,100 557 ------ ------ CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Consumer products Capital expenditures (364) (320) Purchases of businesses, net of acquired cash (62) (255) Proceeds from sales of businesses 81 Other 11 26 Financial services Investments in finance assets (61) (155) Proceeds from finance assets 105 70 ------ ------ Net cash used in investing activities (290) (634) ------ ------
See notes to condensed consolidated financial statements. Continued -7- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Continued) (in millions of dollars) (Unaudited)
For the Three Months Ended March 31, ---------------------------- 2002 2001 ------ ------ CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Consumer products Net issuance of short-term borrowings $ 2,043 $ 2,195 Long-term debt proceeds 13 15 Long-term debt repaid (738) (783) Financial services Net repayment of short-term borrowings (512) (68) Long-term debt proceeds 440 Repurchase of Philip Morris common stock (1,087) (986) Dividends paid on Philip Morris common stock (1,248) (1,171) Issuance of Philip Morris common stock 306 351 Other (74) (11) ------- ------- Net cash used in financing activities (857) (458) ------- ------- Effect of exchange rate changes on cash and cash equivalents (23) 24 ------- ------- Cash and cash equivalents: Decrease (70) (511) Balance at beginning of period 453 937 ------- ------- Balance at end of period $ 383 $ 426 ======= =======
See notes to condensed consolidated financial statements. -8- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Accounting Policies: - ----------------------------- The interim condensed consolidated financial statements of Philip Morris Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and related notes, and management's discussion and analysis of financial condition and results of operations which appear in the Company's Annual Report to Stockholders and which are incorporated by reference into the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Form 10-K"). Balance sheet accounts are segregated by two broad types of businesses. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices. Certain prior year amounts have been reclassified to conform with the current year's presentation. Note 2. Recently Adopted Accounting Standards: - ----------------------------------------------- On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, the Company stopped recording the amortization of goodwill and indefinite life intangible assets as a charge to earnings during the first quarter of 2002. The Company estimates that net earnings and diluted earnings per share ("EPS") would have been approximately $2.0 billion and $0.91, respectively, for the three months ended March 31, 2001, had the provisions of the new standards been applied as of January 1, 2001. In addition, the Company is required to conduct an annual review of goodwill and intangible assets for potential impairment. The Company completed its review and did not have to record a charge to earnings for an impairment of goodwill or other intangible assets as a result of these new standards. At March 31, 2002, goodwill by segment was as follows (in millions): International tobacco $ 883 North American food 20,649 International food 3,888 Beer 186 ------- Total goodwill $25,606 =======
There were no material changes in the carrying amount of goodwill during the three months ended March 31, 2002. -9- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Intangible assets as of March 31, 2002 were as follows:
Carrying Accumulated Amount Amortization ------- ------------ (in millions) Non-amortizable intangible assets $11,847 Amortizable intangible assets 57 $25 ------- --- Total intangible assets $11,904 $25 ======= ===
Non-amortizable intangible assets substantially comprise brand names purchased through the Nabisco acquisition. Amortizable intangible assets consist primarily of certain trademark licenses and non-compete agreements. The pre-tax amortization expense for intangible assets during the quarter ended March 31, 2002 was $2 million. Based upon the amortizable intangible assets recorded on the balance sheet as of March 31, 2002, amortization expense for each of the next five years is estimated to be $8 million or less. Effective January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on the Company's financial position, results of operations or cash flows. Effective January 1, 2002, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." The adoption of EITF Issues No. 00-14 and No. 00-25 resulted in a reduction of revenues of approximately $2.4 billion in the first quarter of 2001. Marketing, administration and research costs were reduced in the first quarter of 2001 by approximately $2.6 billion. Cost of sales increased in the first quarter of 2001 by approximately $145 million and excise taxes on products increased by approximately $56 million. The adoption of these EITF Issues had no impact on net earnings or basic and diluted EPS. Note 3. Financial Instruments: - ------------------------------- Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively referred to as "SFAS No. 133"). As of January 1, 2001, the adoption of these new standards resulted in a cumulative effect of an accounting change that reduced net earnings by $6 million, net of income taxes of $3 million, and decreased accumulated other comprehensive losses by $15 million, net of taxes of $8 million. During the quarters ended March 31, 2002 and 2001, ineffectiveness related to fair value hedges and cash flow hedges were not material. The Company is hedging forecasted transactions for periods not exceeding the next twenty-two months. For the quarter ended March 31, 2002, the Company estimates derivative gains of $52 million, net of taxes, reported in accumulated other comprehensive losses will be reclassified to the consolidated statement of earnings within the next twelve months. During the quarters ended March 31, 2002 and 2001, a gain of $1 million, net of income taxes, and $4 million, net of income taxes of $2 million, respectively, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive losses within currency translation adjustments. -10- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Hedging activity affected accumulated other comprehensive losses, net of income taxes, as follows:
For the Three Months Ended March 31, ------------------------------- 2002 2001 ---- ---- (in millions) Balance as of January 1 $ 33 $ - Impact of SFAS No. 133 adoption 15 Derivative losses (gains) transferred to earnings 92 (30) Change in fair value (50) 47 ---- ---- Balance as of March 31 $ 75 $ 32 ==== ====
Note 4. Acquisitions and Divestitures: - --------------------------------------- During the first quarter of 2002, Kraft Foods International, Inc. ("KFI") acquired a biscuit company in Australia for an aggregate cost of $62 million and Kraft Foods North America, Inc. ("KFNA") sold several small North American food businesses, which were previously classified as businesses held for sale, for $81 million. During the first quarter of 2001, Philip Morris International, Inc. ("PMI") increased its interest in an Argentine tobacco company for an aggregate cost of $220 million. In addition, KFI purchased coffee businesses in Romania and Morocco. The operating results of businesses acquired and sold were not material to the consolidated operating results of the Company in any of the periods presented. -11- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 5. Earnings Per Share: - ---------------------------- Basic and diluted EPS were calculated using the following:
For the Three Months Ended March 31, ------------------------------- 2002 2001 ---- ---- (in millions) Earnings before cumulative effect of accounting change $2,365 $1,786 Cumulative effect of accounting change (6) ------ ------ Net earnings $2,365 $1,780 ====== ====== Weighted average shares for basic EPS 2,145 2,201 Plus incremental shares from assumed conversions: Restricted stock and stock rights 3 6 Stock options 23 22 ------ ------ Weighted average shares for diluted EPS 2,171 2,229 ====== ======
The number of shares of common stock excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive was immaterial for the first quarter of 2002 and 2001. Note 6. Segment Reporting: - --------------------------- The products of the Company's subsidiaries include cigarettes, food (consisting principally of a wide variety of snacks, beverages, cheese, grocery products and convenient meals) and beer. Another subsidiary of the Company, Philip Morris Capital Corporation, is primarily engaged in leasing activities. The products and services of these subsidiaries constitute the Company's reportable segments of domestic tobacco, international tobacco, North American food, international food, beer and financial services. The Company's management reviews operating companies income to evaluate segment performance and allocate resources. Operating companies income for the segments excludes general corporate expenses and amortization of intangibles. Interest and other debt expense, net, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the Company's management. -12- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Segment data were as follows:
For the Three Months Ended March 31, ---------------------------- 2002 2001 ---- ---- (in millions) Net revenues: Domestic tobacco $ 5,018 $ 4,577 International tobacco 7,034 6,971 North American food 5,294 5,234 International food 1,853 1,963 Beer 1,219 1,114 Financial services 117 100 ------- ------- Total net revenues $20,535 $19,959 ======= ======= Operating companies income: Domestic tobacco $ 1,250 $ 702 International tobacco 1,564 1,558 North American food 1,098 1,143 International food 252 239 Beer 107 124 Financial services 71 64 ------- ------- Total operating companies income 4,342 3,830 Amortization of intangibles (2) (253) General corporate expenses (169) (210) ------- ------- Total operating income 4,171 3,367 Interest and other debt expense, net (293) (451) ------- ------- Total earnings before income taxes, minority interest and cumulative effect of accounting change $ 3,878 $ 2,916 ======= =======
During 2002, a pre-tax charge of $27 million was recorded to consolidate food production lines in North America. This pre-tax charge was included in marketing, administration and research costs for the North American food segment. During 2002, a pre-tax charge of $15 million was recorded in marketing, administration and research costs for a beer asset impairment. During 2001, voluntary early retirement programs were announced for certain eligible salaried employees in the beer and food businesses. During the first quarter of 2002, approximately 800 employees accepted the benefits offered by these programs and elected to retire or terminate employment. As a result, pre-tax charges of $135 million, $7 million and $8 million were recorded in marketing, administration and research costs of the North American food, international food and beer segments, respectively, for the quarter ended March 31, 2002. As discussed in Note 7. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among Philip Morris Incorporated ("PM Inc."), certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, a $500 million pre-tax charge was recorded in marketing, administration and research costs of the domestic tobacco segment for the quarter ended March 31, 2001. In -13- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the March 31, 2002 and December 31, 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in the consolidated statement of earnings. During the first quarter of 2001, KFNA sold a North American food factory, which resulted in a pre-tax loss of $29 million. Note 7. Contingencies: - ----------------------- Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and Philip Morris International Inc. ("PMI"), the Company's international tobacco subsidiary, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Overview of Tobacco-Related Litigation Types and Number of Cases Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms "Lights" and "Ultra Lights" constitutes deceptive and unfair trade practices, suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and various antitrust suits. Damages claimed in some of the smoking and health class actions, health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. In July 2000, a jury in a Florida smoking and health class action returned a punitive damages award of approximately $74 billion against PM Inc. (see discussion of the Engle case below). Plaintiffs' theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below. Exhibit 99.1 hereto lists the smoking and health class actions, health care cost recovery and certain other actions pending as of May 1, 2002, and discusses certain developments in such cases since March 19, 2002. As of May 1, 2002 there were approximately 1,500 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some instances, the Company, compared with approximately 1,500 such cases on May 1, 2001, and approximately 390 such cases on May 1, 2000. In certain jurisdictions, individual smoking and health cases have been aggregated for trial in a single proceeding; the largest such proceeding aggregates 1,250 cases in West Virginia and is currently scheduled for trial in September 2002. An estimated 12 of the individual cases involve allegations of various personal injuries allegedly related to exposure to environmental tobacco smoke ("ETS"). In addition, approximately 2,825 additional individual cases are pending in Florida by current and former flight attendants claiming personal injuries allegedly related to ETS. The flight attendants allege that they are members of an ETS smoking and health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking -14- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) punitive damages. As of May 1, 2002, there were an estimated 25 smoking and health purported class actions pending in the United States against PM Inc. and, in some cases, the Company (including four that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 31 such cases on May 1, 2001, and approximately 40 such cases on May 1, 2000. Some of these actions purport to constitute statewide class actions and were filed after May 1996, when the United States Court of Appeals for the Fifth Circuit reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. As of May 1, 2002, there were an estimated 44 health care cost recovery actions, including the suit discussed below under "Federal Government's Lawsuit," filed by the United States government, pending in the United States against PM Inc. and, in some instances, the Company, compared with approximately 50 such cases pending on May 1, 2001, and 50 such cases on May 1, 2000. In addition, health care cost recovery actions are pending in Israel, the Marshall Islands, the Province of British Columbia, Canada, France (in a case brought by a local agency of the French social security health insurance system) and Spain. There are also a number of other tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries, including an estimated 70 smoking and health cases brought on behalf of individuals (Argentina (42), Brazil (18), Czech Republic (1), Ireland (1), Israel (2), Italy (1), Japan (1), the Philippines (1), Scotland (1), and Spain (2)), compared with approximately 60 such cases on May 1, 2001, and 50 such cases on May 1, 2000. In addition, as of May 1, 2002, there were eight smoking and health putative class actions pending outside the United States (Brazil (1), Canada (3), and Spain (4)), compared with 11 such cases on May 1, 2001 and ten such cases on May 1, 2000. Pending and Upcoming Trials A trial is underway in Florida in an individual smoking and health case in which PM Inc. is a defendant. Jury selection is also proceeding in a smoking and health class action in Louisiana in which PM Inc. is a defendant and in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs. In addition, later in May, trials are scheduled to begin in California and Florida in two individual smoking and health cases in which PM Inc. is a defendant and in three cases in Florida brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by ETS. As set forth in Exhibit 99.2 hereto, additional cases against PM Inc. and, in some instances, the Company, are scheduled for trial through the end of 2002. They include two purported class actions in California in which plaintiffs seek damages under the California Business and Professions Code for the costs of cigarettes purchased by class members during the class period and a case in West Virginia that aggregates 1,250 individual smoking and health cases, an estimated 12 individual smoking and health cases and 12 additional cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by ETS. Three of the individual smoking and health cases are scheduled to begin in June and eight of the cases brought by flight attendants are scheduled to begin in the next three months. Cases against other tobacco companies are also scheduled for trial through the end of 2002. Trial dates, however, are subject to change. Recent Trial Results Since January 1999, jury verdicts have been returned in 18 smoking and health and health care cost recovery cases in which PM Inc. was a defendant. Verdicts in favor of PM Inc. and other defendants were returned in 11 of the 18 cases. These 11 cases were tried in Rhode Island, West Virginia, Ohio (2), New Jersey, Florida, New York (2), Mississippi and Tennessee (2). Plaintiffs' appeals or post-trial motions challenging the verdicts are pending in Rhode Island, West Virginia and in Florida. In addition, a mistrial was declared in New York in an asbestos contribution case, and plaintiffs subsequently voluntarily dismissed the case. The chart below lists the verdicts -15- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) and post-trial developments in the seven cases that have gone to trial since January 1999 in which verdicts were returned in favor of plaintiffs.
Location Type of Post-Trial Date of Court Case Verdict Developments - ---- -------- ---- ------- ------------ March Oregon Individual $168,500 in compensatory damages PM Inc. filed post-trial 2002 Smoking and and $150 million in punitive motions challenging the Health damages against PM Inc. punitive damages award and, in May 2002, the trial court reduced the punitive damages award to $100 million. PM Inc. intends to file post-trial motions challenging the verdict. June California Individual $5.5 million in compensatory In August 2001, the trial court 2001 Smoking and damages, and $3 billion in reduced the punitive damages Health punitive damages against PM Inc. award to $100 million; PM Inc. has appealed. June New York Health Care $17.8 million in compensatory In February 2002, the trial court 2001 Cost damages, including $6.8 million awarded plaintiffs $38 million in Recovery against PM Inc. attorneys' fees. Defendants have appealed. July Florida Smoking and $145 billion in punitive damages See "Engle Class Action," below. 2000 Health against all defendants, including Class Action $74 billion against PM Inc. March California Individual $1.72 million in compensatory Defendants have appealed. 2000 Smoking and damages against PM Inc. and Health another defendant, and $10 million in punitive damages against PM Inc. and $10 million in punitive damages against the other defendant. March Oregon Individual $800,000 in compensatory The trial court reduced the 1999 Smoking and damages, $21,500 in medical punitive damages award to $32 Health expenses and $79.5 million in million, and PM Inc. has appealed. punitive damages against PM Inc. February California Individual $1.5 million in compensatory The trial court reduced the 1999 Smoking and damages and $50 million in punitive damages award to $25 Health punitive damages against PM Inc. million and PM Inc. appealed. In November 2001, a California District Court of Appeals affirmed the trial court's ruling, and PM Inc. has appealed to the California Supreme Court.
-16- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) In addition, since January 1999, jury verdicts have been returned in 12 tobacco-related cases in which neither the Company nor any of its subsidiaries were defendants. Verdicts in favor of defendants were returned in eight of the 12 cases in cases tried in Connecticut, Texas, South Carolina, Mississippi, Louisiana, Missouri and Tennessee (2). Plaintiffs' appeal is pending in Mississippi. Verdicts in favor of plaintiffs were returned in four of the 12 cases in cases tried in Australia, Kansas and Florida (2). Defendants' appeal or post-trial motions are pending. In addition, in a case in France the trial court found in favor of plaintiff, however, the appellate court reversed the trial court's ruling and dismissed plaintiff's claim. Engle Class Action Verdicts have been returned and judgment has been entered against PM Inc. and other defendants in the first two phases of this three-phase smoking and health class action trial in Florida. The class consists of all Florida residents and citizens, and their survivors, "who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine." In July 1999, the jury returned a verdict against defendants in phase one of the trial concerning certain issues determined by the trial court to be "common" to the causes of action of the plaintiff class. Among other things, the jury found that smoking cigarettes causes 20 diseases or medical conditions, that cigarettes are addictive or dependence-producing, defective and unreasonably dangerous, that defendants made materially false statements with the intention of misleading smokers, that defendants concealed or omitted material information concerning the health effects and/or the addictive nature of smoking cigarettes, and that defendants were negligent and engaged in extreme and outrageous conduct or acted with reckless disregard with the intent to inflict emotional distress. During phase two of the trial, the claims of three of the named plaintiffs were adjudicated in a consolidated trial before the same jury that returned the verdict in phase one. In April 2000, the jury determined liability against the defendants and awarded $12.7 million in compensatory damages to the three named plaintiffs. In July 2000, the same jury returned a verdict assessing punitive damages on a lump sum basis for the entire class totaling approximately $145 billion against the various defendants in the case, including approximately $74 billion severally against PM Inc. PM Inc. believes that the punitive damages award was determined improperly and that it should ultimately be set aside on any one of numerous grounds. Included among these grounds are the following: under applicable law, (i) defendants are entitled to have liability and damages for each plaintiff tried by the same jury, an impossibility due to the jury's dismissal; (ii) punitive damages cannot be assessed before the jury determines entitlement to, and the amount of, compensatory damages for all class members; (iii) punitive damages must bear a reasonable relationship to compensatory damages, a determination that cannot be made before compensatory damages are assessed for all class members; and (iv) punitive damages can "punish" but cannot "destroy" the defendant. In March 2000, at the request of the Florida legislature, the Attorney General of Florida issued an advisory legal opinion stating that "Florida law is clear that compensatory damages must be determined prior to an award of punitive damages" in cases such as Engle. As noted above, compensatory damages for all but three members of the class have not been determined. Following the verdict in the second phase of the trial, the jury was dismissed, notwithstanding that liability and compensatory damages for all but three class members have not yet been determined. According to the trial plan, phase three of the trial will address other class members' claims, including issues of specific causation, reliance, affirmative defenses and other individual-specific issues regarding entitlement to damages, in individual trials before separate juries. It is unclear how the trial plan will be further implemented. The trial plan provides that the punitive damages award should be standard as to each class member and acknowledges that the actual size of the class will not be known until the last class member's case has withstood appeal, i.e., the punitive damages amount would be divided equally among those plaintiffs who, in addition to the successful phase two plaintiffs, are ultimately successful in phase three of the trial and in any appeal. -17- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Following the jury's punitive damages verdict in July 2000, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. In November 2000, the federal district court remanded the case to state court on the grounds that the removal was premature. The trial judge in the state court, without a hearing, then immediately denied the defendants' post-trial motions and entered judgment on the compensatory and punitive damages awarded by the jury. PM Inc. and the Company believe that the entry of judgment by the trial court is unconstitutional and violates Florida law. PM Inc. has filed an appeal with respect to the entry of judgment, class certification and numerous other reversible errors that have occurred during the trial. PM Inc. has also posted a $100 million bond to stay execution of the judgment with respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million, regardless of the amount of punitive damages ("bond cap legislation"). Plaintiffs had previously indicated that they believe the bond cap legislation is unconstitutional and might seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM Inc. to post a bond in the full amount of the judgment and, absent appellate relief, PM Inc. would not be able to stay any attempted execution of the judgment in Florida. PM Inc. and the Company will take all appropriate steps to seek to prevent this worst-case scenario from occurring. In May 2001, the trial court approved a stipulation (the "Stipulation") among PM Inc., certain other defendants, plaintiffs and the plaintiff class that provides that execution or enforcement of the punitive damages component of the Engle judgment will remain stayed against PM Inc. and the other participating defendants through the completion of all judicial review. As a result of the Stipulation and in addition to the $100 million bond it previously posted, PM Inc. placed $1.2 billion into an interest-bearing escrow account for the benefit of the Engle class. Should PM Inc. prevail in its appeal of the case, both amounts are to be returned to PM Inc. PM Inc. also placed an additional $500 million into a separate interest-bearing escrow account for the benefit of the Engle class. If PM Inc. prevails in its appeal, this amount will be paid to the court, and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. In connection with the Stipulation, the Company recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001. In other developments, in August 1999, the trial judge denied a motion filed by PM Inc. and other defendants to disqualify the judge. The motion asserted, among other things, that the trial judge was required to disqualify himself because he is a former smoker who has a serious medical condition of a type that the plaintiffs claim, and the jury has found, is caused by smoking, making him financially interested in the result of the case and, under plaintiffs' theory of the case, a member of the plaintiff class. The Third District Court of Appeals denied defendants' petition to disqualify the trial judge. In January 2000, defendants filed a petition for a writ of certiorari to the United States Supreme Court requesting that it review the issue of the trial judge's disqualification, and in May 2000 the writ of certiorari was denied. PM Inc. and the Company remain of the view that the Engle case should not have been certified as a class action. The certification is inconsistent with the overwhelming majority of federal and state court decisions that have held that mass smoking and health claims are inappropriate for class treatment. PM Inc. has filed an appeal challenging the class certification and the compensatory and punitive damages awards, as well as numerous other reversible errors that it believes occurred during the trial to date. -18- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Smoking and Health Litigation Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act. In May 1996, the United States Court of Appeals for the Fifth Circuit held in the Castano case that a class consisting of all "addicted" smokers nationwide did not meet the standards and requirements of the federal rules governing class actions. Since this class decertification, lawyers for plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise "addiction" claims and, in many cases, claims of physical injury as well. As of May 1, 2002, smoking and health putative class actions were pending in Alabama, California, Florida, Illinois, Indiana, Louisiana, Michigan, Missouri, New York, North Carolina, Ohio, Oregon, Tennessee, Utah, West Virginia and the District of Columbia, as well as in Brazil, Canada, Israel and Spain. Class certification has been denied or reversed by courts in 29 smoking and health class actions involving PM Inc. in Arkansas, the District of Columbia, Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada (4), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while classes remain certified in the Engle case in Florida (discussed above) and a case in Louisiana in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs for class members. In May 1999, the United States Supreme Court declined to review the decision of the United States Court of Appeals for the Third Circuit affirming a lower court's decertification of a class. In November 2001, in the first medical monitoring class action case to go to trial, a West Virginia jury returned a verdict in favor of all defendants, including PM Inc.; in January 2002, the trial court denied plaintiffs' motion for a new trial. Health Care Cost Recovery Litigation Overview In certain pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including union health and welfare funds ("unions"), Native American tribes, insurers and self-insurers such as Blue Cross and Blue Shield plans, hospitals, taxpayers and others, are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. Certain of the health care cost recovery cases purport to be brought on behalf of a class of plaintiffs. The claims asserted in the health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade -19- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) practices and false advertising, and claims under federal and state RICO statutes. Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to "set off" any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party. Although there have been some decisions to the contrary, most courts that have decided motions in these cases have dismissed all or most of the claims against the industry. In addition, eight federal circuit courts of appeals, the Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia circuits, as well as California and Tennessee intermediate appellate courts, relying primarily on grounds that plaintiffs' claims were too remote, have affirmed dismissals of, or reversed trial courts that had refused to dismiss, health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs' appeals from the cases decided by the courts of appeals for the Second, Third, Ninth and District of Columbia circuits. As of May 1, 2002, there were an estimated 44 health care cost recovery cases pending in the United States against PM Inc., and in some instances, the Company, including the case filed by the United States government, which is discussed below under "Federal Government's Lawsuit." The cases brought in the United States include actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11 Brazilian states, 11 Brazilian cities and a group of Argentine unions. The actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 10 Brazilian states and 11 Brazilian cities were consolidated for pre-trial purposes and transferred to the United States District Court for the District of Columbia. The court has remanded the cases of Venezuela, Ecuador and two Brazilian states to state court in Florida. Defendants appealed to the United States Court of Appeals for the District of Columbia Circuit, which held that it lacked jurisdiction to review the remand orders and could not prohibit the district court from remanding to state court those cases upon which the district court had not yet acted. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the cases brought by Venezuela and the Brazilian state of Espirito Santo were dismissed by the state court, and Venezuela has appealed. The district court dismissed the cases brought by Guatemala, Nicaragua, Ukraine, and the Province of Ontario, and plaintiffs appealed. In May 2001, the United States Court of Appeals for the District of Columbia Circuit affirmed the district court's dismissals of the cases brought by Guatemala, Nicaragua and Ukraine, and in October 2001, the United States Supreme Court refused to consider plaintiffs' appeal. In November 2001, the Province of Ontario voluntarily dismissed its appeal. In January 2001, the Superior Court of the District of Columbia dismissed the suit brought by the Argentine unions. In addition to cases brought in the United States, health care cost recovery actions have also been brought in Israel, the Marshall Islands, the Province of British Columbia, Canada, France and Spain, and other entities have stated that they are considering filing such actions. In May 2002, the Supreme Court of the Republic of the Marshall Islands affirmed the trial court's dismissal of the Marshall Islands case. In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor of defendants on all counts. In June 2001, a New York jury returned a verdict awarding $6.83 million in compensatory damages against PM Inc. and a total of $11 million against four other defendants in a health care cost recovery action brought by a Blue Cross and Blue Shield plan. In February 2002, the court awarded -20- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) plaintiff approximately $38 million for attorneys' fees. Defendants, including PM Inc., have appealed. Settlements of Health Care Cost Recovery Litigation In November 1998, PM Inc. and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the "MSA") with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements"). The MSA has received final judicial approval in all 52 settling jurisdictions. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional annual payments of $250 million through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. The State Settlement Agreements also include provisions, discussed below in Management's Discussion and Analysis of Financial Condition and Results of Operations, relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. The State Settlement Agreements have materially adversely affected the volumes of PM Inc. and the Company; the Company believes that they may materially adversely affect the business, volumes, results of operations, cash flows or financial position of PM Inc. and the Company in future periods. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. Certain litigation, described in Exhibit 99.1, has arisen challenging the validity of the MSA and alleging violations of antitrust laws. -21- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Federal Government's Lawsuit In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers and others, including PM Inc. and the Company, asserting claims under three federal statutes, the Medical Care Recovery Act ("MCRA"), the Medicare Secondary Payer ("MSP") provisions of the Social Security Act and the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The lawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants' fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans' health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than $20 billion annually. It also seeks various types of what it alleges to be equitable and declaratory relief, including disgorgement, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government's future costs of providing health care resulting from defendants' alleged past tortious and wrongful conduct. PM Inc. and the Company moved to dismiss this lawsuit on numerous grounds, including that the statutes invoked by the government do not provide a basis for the relief sought. In September 2000, the trial court dismissed the government's MCRA and MSP claims, but permitted discovery to proceed on the government's claims for relief under RICO. In October 2000, the government moved for reconsideration of the trial court's order to the extent that it dismissed the MCRA claims for health care costs paid pursuant to government health benefit programs other than Medicare and the Federal Employees Health Benefits Act. In February 2001, the government filed an amended complaint attempting to replead the MSP claims. In July 2001, the court denied the government's motion for reconsideration of the dismissal of the MCRA claims and dismissed the government's amended MSP claims. Trial of the case is currently scheduled for July 2003. In June 2001, representatives of the Department of Justice invited the defendants, including PM Inc. and the Company, to participate in settlement discussions. A meeting with representatives of the Department of Justice was held in July 2001. PM Inc. and the Company cannot predict whether discussions will continue or the outcome of any such discussions. The Company and PM Inc. believe that they have a number of valid defenses to the lawsuit and will continue to vigorously defend it. Certain Other Tobacco-Related Litigation Lights/Ultra Lights Cases: As of May 1, 2002, there were 13 putative class actions pending against PM Inc. and the Company in California, Florida, Illinois, Massachusetts, Minnesota, Missouri, New Hampshire (2), New Jersey, Ohio (2), Tennessee and West Virginia on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plaintiffs in these cases allege, among other things, that the use of the terms "Lights" and/or "Ultra Lights" constitutes deceptive and unfair trade practices, and seek injunctive and equitable relief, including restitution. Classes have been certified in Illinois, Massachusetts and Florida. Trial in the Illinois case is scheduled for January 2003. Cigarette Importation Cases: As of May 1, 2002, the European Community and ten member states, various Departments of Colombia, Ecuador, Belize and Honduras had filed suits in the United States against the Company and certain of its subsidiaries, including PM Inc. and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into the plaintiff jurisdictions in an effort to evade taxes. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive relief. In February 2002, the courts granted defendants' motions to dismiss all of the actions. In the Colombia and European Community actions, however, the RICO and fraud claims predicated on allegations of money laundering claims were dismissed without prejudice. Plaintiffs in each of the cases have appealed. In October -22- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 2001, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a cigarette importation case filed against another cigarette manufacturer and in March 2002, plaintiff in that case petitioned the United States Supreme Court for further review. Asbestos Contribution Cases: As of May 1, 2002, an estimated 12 suits were pending on behalf of former asbestos manufacturers and affiliated entities against domestic tobacco manufacturers, including PM Inc. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. The aggregate amounts claimed in these cases range into the billions of dollars. Retail Leaders Case: Three domestic tobacco manufacturers filed suit against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that became available to retailers in October 1998. The complaint alleges that this retail merchandising program is exclusionary, creates an unreasonable restraint of trade and constitutes unlawful monopolization. In addition to an injunction, plaintiffs seek unspecified treble damages, attorneys' fees, costs and interest. In June 1999, the court issued a preliminary injunction enjoining PM Inc. from prohibiting retail outlets that participate in the program at one of the levels from installing competitive permanent signage in any section of the "industry fixture" that displays or holds packages of cigarettes manufactured by a firm other than PM Inc., or requiring those outlets to allocate a percentage of cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market share. The court also enjoined PM Inc. from prohibiting retailers participating in the program from advertising or conducting promotional programs of cigarette manufacturers other than PM Inc. In October 2001, PM Inc. moved for summary judgment dismissing all of plaintiffs' claims. In May 2002, the court granted the summary judgment motion and dismissed all of the claims with prejudice and also dissolved the preliminary injunction. Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators, allege that PM Inc. has violated the Robinson-Patman Act in connection with its promotional and merchandising programs available to retail stores and not available to cigarette vending machine operators. The initial complaint was amended to bring the total number of plaintiffs to 211, but by stipulated orders, all claims were stayed, except those of ten plaintiffs that proceeded to pre-trial discovery. Plaintiffs request actual damages, treble damages, injunctive relief, attorneys' fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs' motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. In August 2001, the court granted PM Inc.'s motion for summary judgment and dismissed, with prejudice, the claims of the ten plaintiffs. In October 2001, the court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuit following the stipulation of all plaintiffs that the district court's dismissal would, if affirmed, be binding on all plaintiffs. Tobacco Price Cases: As of May 1, 2002, there were 36 putative class actions pending against PM Inc. and other domestic tobacco manufacturers, as well as, in certain instances, the Company and PMI, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. Seven of the putative class actions were filed in various federal district courts by direct purchasers of tobacco products, and the remaining 29 were filed in 14 states and the District of Columbia by retail purchasers of tobacco products. In November 2001, plaintiffs' motion for class certification was granted in a case pending in state court in Kansas. In November 2001, plaintiffs' motion for class certification was denied in a case pending in state court in Minnesota. Plaintiffs' motion for class certification and defendants' motions for summary judgment are pending in the State of Michigan. The seven federal class actions have been consolidated in the United States District Court for the Northern District of Georgia. In November 2000, the district court granted in part and denied in part defendants' motion to dismiss portions of the consolidated complaint. The court certified a class of plaintiffs who made direct purchases between February 1996 and February 2000. In June 2001, the court granted defendants' motion to dismiss the fraudulent concealment allegations in the complaint. In February 2002, defendants moved for summary judgment dismissing plaintiffs' claims, and a hearing on the motion was held in April 2002. The cases -23- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) are listed in Exhibit 99.1. Cases Under the California Business and Professional Code: In June 1997 and July 1998, two suits were filed in California courts alleging that domestic cigarette manufacturers, including PM Inc. and others, have violated California Business and Professions Code Sections 17200 and 17500 regarding unfair and fraudulent business practices. Class certification was granted as to plaintiffs' claims that defendants violated sections 17200 and/or 17500 of California Business and Professions Code pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctive relief. Trials in the cases are scheduled for July 2002 and October 2002. Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a purported class of tobacco growers and quota-holders, and amended complaints were filed in May 2000 and in August 2000. The second amended complaint alleges that defendants, including PM Inc., violated antitrust laws by bid-rigging and allocating purchases at tobacco auctions and by conspiring to undermine the tobacco quota and price-support program administered by the federal government. In October 2000, defendants filed motions to dismiss the amended complaint and to transfer the case, and plaintiffs filed a motion for class certification. In November 2000, the court granted defendants' motion to transfer the case to the United States District Court for the Middle District of North Carolina. In December 2000, plaintiffs served a motion for leave to file a third amended complaint to add tobacco leaf buyers as defendants. This motion was granted, and the additional parties were served in February 2001. In March 2001, the leaf buyer defendants filed a motion to dismiss the case. In July 2001, the court denied the manufacturer and leaf buyer defendants' motions to dismiss the case, and in April 2002 granted plaintiffs' motion for class certification. Defendants have petitioned the United States Court of Appeals for the Fourth Circuit for review of the class certification ruling. Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federal district court in the Eastern District of New York that purports to consolidate punitive damages claims in ten tobacco-related actions currently pending in the federal district court in the Eastern Districts of New York and Pennsylvania. In November 2000, the court hearing this case indicated that, in its view, it appears likely that plaintiffs will be able to demonstrate a basis for certification of an opt-out compensatory damages class and a non-opt-out punitive damages class. In December 2000, plaintiffs served a motion for leave to file an amended complaint and a motion for class certification. A hearing on plaintiffs' motion for class certification was held in March 2001. Certain Other Actions National Cheese Exchange Cases: Since 1996, seven putative class actions have been filed by various dairy farmers alleging that Kraft and others engaged in a conspiracy to fix and depress the prices of bulk cheese and milk through their trading activity on the National Cheese Exchange. Plaintiffs seek injunctive and equitable relief and unspecified treble damages. Plaintiffs voluntarily dismissed two of the actions after class certification was denied. Three cases were consolidated in state court in Wisconsin, and in November 1999, the court granted Kraft's motion for summary judgment. In June 2001, the Wisconsin Court of Appeals affirmed the trial court's ruling dismissing the cases. In April 2002, the Wisconsin Supreme Court affirmed the intermediate appellate court's ruling. Kraft's motion to dismiss was granted in a case pending in the United States District Court for the Central District of California. The United States Court of Appeals for the Ninth Circuit reversed and remanded the case for further proceedings. Following the remand, in April 2002, the district court granted a motion for summary judgment dismissing the case. A case in Illinois state court has been settled and dismissed. No classes have been certified in any of the cases. Italian Tax Matters: One hundred ninety-four tax assessments alleging the nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1996 and income taxes for the years 1987 to 1996) have been served upon certain affiliates of the Company, including six new assessments (for the year 1996), which were served in October and December 2001. The aggregate amount of alleged unpaid taxes assessed to date is the euro equivalent of $2.1 billion. In addition, the euro equivalent of $3.1 billion in interest and penalties has been assessed. The Company anticipates that value-added and income tax assessments may also be received with respect to subsequent years. All of the assessments are being vigorously contested. To date, the Italian administrative tax court in Milan has overturned 188 of the assessments. The decisions to overturn 185 assessments have been appealed by the tax authorities to the regional appellate court in Milan. To date, the regional appellate court has rejected 72 of the appeals filed by the tax authorities. The tax authorities have appealed 45 of the 72 decisions of the regional appellate court to the Italian Supreme Court, and a hearing on -24- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) these cases was held in December 2001. Six of the 51 decisions were not appealed and are now final. In March 2002, the Italian Supreme Court rejected 12 of the 45 appeals and these 12 cases are now final. Also in March 2002, the Italian Supreme Court vacated the decisions of the regional appellate court in 16 of the cases and remanded these cases back to the regional appellate court for further hearings on the merits. In a separate proceeding in October 1997, a Naples court dismissed charges of criminal association against certain present and former officers and directors of affiliates of the Company, but permitted tax evasion and related charges to remain pending. In February 1998, the criminal court in Naples determined that jurisdiction was not proper, and the case file was transmitted to the public prosecutor in Milan. In December 2000, the Milan prosecutor took certain procedural steps that may indicate his intention to recommend that charges be pursued against certain of these present and former officers and directors. In March 2002, these present and former officers and directors received notices that an initial hearing is scheduled for June 2002 at which time the "preliminary judge" hearing the case will evaluate whether the Milan prosecutor's charges should be sent to a criminal judge for a full trial. The Company, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings. --------------------- It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and punitive damages against PM Inc. have been returned in the Engle smoking and health class action, several individual smoking and health cases and a health care cost recovery case and are being appealed. It is possible that there could be further adverse developments in these cases and that additional cases could be decided unfavorably. An unfavorable outcome or settlement of a pending tobacco-related litigation could encourage the commencement of additional litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation, and the Company has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. The present legislative and litigation environment is substantially uncertain, and it is possible that the Company's business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to all litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company's stockholders to do so. Note 8. Subsequent Events: - --------------------------- In April 2002, the Company's stockholders approved changing the Company's name from Philip Morris Companies Inc. to Altria Group, Inc. The Company's Board of Directors retains the discretion to determine when to effect the name change. -25- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Operating Results - ------------------------------ For the Three Months Ended March 31,
Net Revenues ----------------------------- (in millions) 2002 2001 ------- ------- Domestic tobacco $ 5,018 $ 4,577 International tobacco 7,034 6,971 North American food 5,294 5,234 International food 1,853 1,963 Beer 1,219 1,114 Financial services 117 100 ------- ------- Net revenues $20,535 $19,959 ======= =======
Operating Income ---------------------------- (in millions) 2002 2001 ------ ------ Domestic tobacco $1,250 $ 702 International tobacco 1,564 1,558 North American food 1,098 1,143 International food 252 239 Beer 107 124 Financial services 71 64 ------ ------ Operating companies income 4,342 3,830 Amortization of intangibles (2) (253) General corporate expenses (169) (210) ------ ------ Operating income $4,171 $3,367 ====== ======
Several events occurred during the first quarters of 2002 and 2001 that affected the comparability of statement of earnings amounts. In order to isolate the impact of these events and discuss underlying business trends, comparisons will be disclosed both including and excluding these events, which were as follows: o Voluntary Retirement Programs - In the fourth quarter of 2001, voluntary early retirement programs were offered to certain salaried employees in the beer and food businesses. During the first quarter of 2002, approximately 800 employees accepted the benefits offered by these programs and elected to retire or terminate employment. As a result, pre-tax charges of $135 million, $7 million and $8 million were recorded in marketing, administration and research costs of the North American food, international food and beer segments, respectively, for the quarter ended March 31, 2002. o Amortization of Intangibles - On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, the Company is no longer required to amortize goodwill and indefinite life intangible assets as a charge to earnings. The Company estimates that net earnings would have been approximately $2.0 billion in the first quarter of 2001 and diluted earnings per share ("EPS") would have been $0.91 had the provisions of the new standards been applied as of January 1, 2001. o Businesses Held for Sale - During 2001, certain Nabisco businesses were reclassified to businesses held for sale, including their estimated results of operations through anticipated sale dates. These businesses have subsequently been sold with the exception of one business that had been held for sale since the acquisition of Nabisco. This business has been included in 2002 reported operating results. -26- o Asset Impairment - During the first quarter of 2002, a pre-tax charge of $15 million was recorded in marketing, administration and research costs for a beer asset impairment. o Sale of Food Factory & Integration Costs - During the first quarter of 2002, Kraft Foods North America, Inc. ("KFNA") recorded a pre-tax charge of $27 million to consolidate production lines in North America. During the first quarter of 2001, KFNA recorded a pre-tax charge of $29 million on the sale of a North American food factory. These pre-tax charges were included in marketing, administration and research costs of the North American food segment in their respective periods. o Litigation Related Expense - As discussed in Note 7. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among Philip Morris Incorporated ("PM Inc."), certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, a $500 million pre-tax charge was recorded in marketing, administration and research costs of the domestic tobacco segment for the quarter ended March 31, 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the March 31, 2002 and December 31, 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in the consolidated statement of earnings. o Kraft Foods Inc. ("Kraft") IPO - On June 13, 2001, Kraft completed an initial public offering ("IPO") of 280,000,000 shares of its Class A common stock at a price of $31.00 per share. The Company used the IPO proceeds, net of underwriting discount and expenses, of $8.4 billion to retire a portion of the debt incurred to finance the acquisition of Nabisco. After the completion of the IPO, the Company owns approximately 83.9% of the outstanding shares of Kraft's capital stock through the Company's ownership of 49.5% of Kraft's Class A common stock and 100% of Kraft's Class B common stock. Kraft's Class A common stock has one vote per share while Kraft's Class B common stock has ten votes per share. Therefore, the Company holds 97.7% of the combined voting power of Kraft's outstanding common stock. Net revenues for the first quarter of 2002 increased $576 million (2.9%) over 2001, due primarily to higher tobacco net revenues. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, net revenues for the first quarter of 2002 increased $596 million (3.0%) over 2001. Operating income for the first quarter of 2002 increased $804 million (23.9%) over the comparable 2001 period. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, operating income for the first quarter of 2002 increased $213 million (5.1%) over the first quarter of 2001, due to increases from all business segments. Operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, increased $512 million (13.4%) over the first quarter of 2001, due primarily to higher operating income from the Company's tobacco operations and the 2001 litigation related expense. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, operating companies income increased $172 million (3.9%), due primarily to higher operating income from all business segments. Currency movements have decreased net revenues by $667 million ($376 million, after excluding the impact of currency movements on excise taxes) and operating companies income by $184 million from the first quarter of 2001. Declines in net revenues and operating companies income are due primarily to the strength of the U.S. dollar against the euro, the Argentine peso and the Japanese yen. Although the Company cannot predict future movements in currency rates, the strength of the U.S. dollar, if sustained during the remainder of 2002, could -27- continue to have an unfavorable impact on net revenues and operating companies income comparisons with 2001. Interest and other debt expense, net, of $293 million for the first quarter of 2002 decreased $158 million from the first quarter of 2001. This decrease was due primarily to higher average debt outstanding in 2001, as a result of the Nabisco acquisition. The Kraft IPO proceeds, net of underwriting discount and expenses, of $8.4 billion were used to retire a portion of the Nabisco acquisition debt during June 2001. During 2002, the Company's effective tax rate decreased by 2.1 percentage points to 35.5%. This decrease is due primarily to the adoption of SFAS No. 141 and SFAS No. 142, under which the Company is no longer required to amortize goodwill and indefinite life intangible assets as a charge to earnings. Diluted and basic EPS of $1.09 and $1.10, respectively, for the first quarter of 2002, increased by 36.3% and 35.8%, respectively, over the first quarter of 2001. Net earnings of $2.4 billion for the first quarter of 2002 increased $585 million (32.9%) over the comparable period of 2001. These results include the unusual items previously discussed. Excluding the after-tax impact of the unusual items, net earnings increased 5.9% to $2.5 billion, diluted EPS increased 8.6% to $1.14 and basic EPS increased 8.5% to $1.15. Operating Results by Business Segment - ------------------------------------- Tobacco - ------- Business Environment The tobacco industry, both in the United States and abroad, has faced, and continues to face, a number of issues that may adversely affect the business, volume, results of operations, cash flows and financial position of PM Inc., Philip Morris International and the Company. These issues, some of which are more fully discussed below, include pending and threatened smoking and health litigation and certain jury verdicts against PM Inc., including a $74 billion punitive damages verdict in the Engle smoking and health class action case discussed in Note 7 and punitive damages awards in individual smoking and health cases discussed in Note 7; the civil lawsuit filed by the United States federal government against various cigarette manufacturers, including PM Inc., and others discussed in Note 7; legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke ("ETS"); price increases in the United States related to the settlement of certain tobacco litigation; actual and proposed excise tax increases in the United States and foreign markets; diversion into the United States market of products intended for sale outside the United States; governmental investigations; actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other proprietary information; governmental and private bans and restrictions on smoking; actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States; actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales outside the United States; actual and proposed legislation in Congress, the state of New York and other jurisdictions inside and outside the United States to require the establishment of fire-safety standards for cigarettes; the diminishing social acceptance of smoking and increased pressure from tobacco control advocates and unfavorable press reports; and other tobacco legislation that may be considered by Congress, the states and other jurisdictions inside and outside the United States. -28- Excise Taxes: Cigarettes are subject to substantial federal, state and local excise taxes in the United States and to similar taxes in most foreign markets. In general, such taxes have been increasing. The United States federal excise tax on cigarettes is currently $0.39 per pack of 20 cigarettes. In the United States, state and local sales and excise taxes vary considerably and, when combined with sales taxes, local taxes and the current federal excise tax, may currently be as high as $2.33. Proposed further tax increases in various jurisdictions are currently under consideration or pending, and such tax increases may result in a combined total tax portion of a pack of cigarettes of $3.89 or more per pack in a given locality in the United States. Congress has considered significant increases in the federal excise tax or other payments from tobacco manufacturers, and significant increases in excise and other cigarette-related taxes have been proposed or enacted at the state and local levels within the United States and in many jurisdictions outside the United States. In the European Union (the "EU"), taxes on cigarettes vary considerably and currently may be as high as the equivalent of $5.04 per pack on the most popular brands. In Germany, where total tax on cigarettes is currently equivalent to $1.95 per pack on the most popular brands, the excise tax is scheduled to increase by approximately the equivalent of $0.17 per pack by January 2003. In the opinion of PM Inc. and Philip Morris International, increases in excise and similar taxes have had an adverse impact on sales of cigarettes. Any future increases, the extent of which cannot be predicted, could result in volume declines for the cigarette industry, including PM Inc. and Philip Morris International, and might cause sales to shift from the premium segment to the discount segment. Tar and Nicotine Test Methods and Brand Descriptors: Jurisdictions around the world have questioned the utility of standardized test methods to measure tar and nicotine yields of cigarettes. In September 1997, the United States Federal Trade Commission ("FTC") issued a request for public comment on its proposed revision of its tar and nicotine test methodology and reporting procedures established by a 1970 voluntary agreement among domestic cigarette manufacturers. In February 1998, PM Inc. and three other domestic cigarette manufacturers filed comments on the proposed revisions. In November 1998, the FTC wrote to the Department of Health and Human Services ("HHS") requesting its assistance in developing specific recommendations on the future of the FTC's program for testing the tar, nicotine, and carbon monoxide content of cigarettes. In November 2001, the National Cancer Institute issued a report as a part of HHS' response to the FTC's request. The report concluded, among other things, that because there was no meaningful difference in smoke exposure or risk to smokers between cigarettes with different machine-measured tar and nicotine yields, the marketing of low yield cigarettes was deceptive. Similarly, public health officials in other countries and the EU have questioned the relevance of the related International Organization for Standardization test method for measuring tar, nicotine, and carbon monoxide yields. The EU Commission has been directed to establish a committee to address, among other things, alternative methods for measuring tar, nicotine and carbon monoxide yields. In addition, public health authorities in the United States, the EU, Brazil and other countries have called for the prohibition of or passed legislation prohibiting the use of brand descriptors such as "Lights" and "Ultra Lights." Brazil banned the use of descriptors in January 2002. In the United States, as of February 15, 2002, there were 11 putative class actions pending against PM Inc. and the Company in which plaintiffs allege, among other things, that the use of the terms "Lights" and/or "Ultra Lights" constitutes deceptive and unfair trade practices. Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA promulgated regulations asserting jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act ("FDCA"). The regulations, which included severe restrictions on the distribution, marketing and advertising of cigarettes, and would have required the industry to comply with a wide range of labeling, reporting, record keeping, manufacturing and other requirements, were declared invalid by the United States Supreme Court in March 2000. The Company has stated that while it continues to oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the provisions of the FDCA, it would support new legislation that would provide for reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there are several bills pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products; PM Inc. has expressed support for one of the bills. The bills take a variety of approaches to the issue of the FDA's proposed regulation of tobacco products ranging from codification of the original FDA regulations under the "drug" and "medical device" provisions of the FDCA to the creation of provisions that would apply uniquely to tobacco products. All of the pending legislation could result in substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. The ultimate outcome of the pending bills cannot be predicted. -29- Ingredient Disclosure Laws: Jurisdictions inside and outside the United States have enacted or proposed legislation or regulations that would require cigarette manufacturers to disclose the ingredients used in the manufacture of cigarettes, and in certain cases, to provide toxicological information supporting the use of ingredients. In the United States, the Commonwealth of Massachusetts has enacted legislation to require cigarette manufacturers to report the flavorings and other ingredients used in each brand-style of cigarettes sold in the Commonwealth. Cigarette manufacturers sued to have the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In September 2000, the district court granted the plaintiffs' motion for summary judgment and permanently enjoined the defendants from requiring cigarette manufacturers to disclose brand-specific information on ingredients in their products, and defendants appealed. In October 2001, the United States Court of Appeals for the First Circuit reversed the district court's decision, holding that the Massachusetts disclosure statute does not constitute an impermissible taking of private property. In November 2001, the First Circuit granted the cigarette manufacturers' petition for rehearing en banc and withdrew the prior opinion. The First Circuit, sitting en banc, heard oral argument in January 2002. The ultimate outcome of this lawsuit cannot be predicted. Similar legislation has been enacted or proposed in other states and in jurisdictions outside the United States, including the EU. Under the EU product directive described below, tobacco companies must disclose the use of, and provide toxicological information about, all ingredients by October 2002. Philip Morris International has voluntarily disclosed the ingredients in its brands in a number of EU member states and in other countries. Other jurisdictions have also enacted or proposed legislation that would require the submission of toxicological information about ingredients and would permit governments to prohibit their use. Health Effects of Smoking and Exposure to ETS: Reports with respect to the health risks of cigarette smoking have been publicized for many years, and the sale, promotion, and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommended various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking during adolescence. Studies with respect to the health risks of ETS to nonsmokers (including lung cancer, respiratory and coronary illnesses, and other conditions) have also received significant publicity. In 1986, the Surgeon General of the United States and the National Academy of Sciences reported that nonsmokers were at increased risk of lung cancer and respiratory illness due to ETS. Since then, a number of government agencies around the world have concluded that ETS causes disease--including lung cancer and heart disease--in nonsmokers. It is the policy of each of PM Inc. and Philip Morris International to support a single, consistent public health message on the role played by cigarette smoking in the development of diseases in smokers, and on smoking and addiction. It is also their policy in relation to these issues and the health effects of exposure to ETS to defer to the judgment of public health authorities as to the text of health warning messages that will best serve the public interest. In 1999, PM Inc. and Philip Morris International established web sites that include, among other things, views of public health authorities on smoking, disease causation in smokers, addiction and ETS. In October 2000, the sites were updated to reflect PM Inc.'s and Philip Morris International's agreement with the overwhelming medical and scientific consensus that cigarette smoking is addictive, and causes lung cancer, heart disease, emphysema and other serious diseases in smokers. The web sites advise smokers, and those considering smoking, to rely on the messages of public health authorities in making all smoking-related decisions. -30- The sites also state that public health officials have concluded that ETS causes or increases the risk of diseases--including lung cancer and heart disease--in non-smoking adults, as well as conditions in children such as asthma, respiratory infections, cough wheeze, otitis media (middle ear infection) and Sudden Infant Death Syndrome. In addition, public health officials have concluded that secondhand smoke can exacerbate adult asthma and cause eye, throat and nasal irritation. In addition, PM Inc. and Philip Morris International believe that particular care should be exercised where children are concerned, and that smokers who have children--particularly young ones--should avoid smoking around them. The World Health Organization's Framework Convention for Tobacco Control: The World Health Organization and its member states are negotiating a proposed Framework Convention for Tobacco Control. The proposed treaty would require signatory nations to enact legislation that would require, among other things, specific actions to prevent youth smoking; restrict or prohibit tobacco product marketing; inform the public about the health consequences of smoking and the benefits of quitting; regulate the content of tobacco products; impose new package warning requirements including the use of pictorial or graphic images; eliminate cigarette smuggling and counterfeit cigarettes; restrict smoking in public places; increase and harmonize cigarette excise taxes; abolish duty-free tobacco sales; and permit and encourage litigation against tobacco product manufacturers. PM Inc. and Philip Morris International have stated that they would support a treaty that member states could consider for ratification, based on the following four principles: (1) smoking-related decisions should be made on the basis of a consistent public health message; (2) effective measures should be taken to prevent minors from smoking; (3) the right of adults to choose to smoke should be preserved; and (4) all manufacturers of tobacco products should compete on a level playing field. The outcome of the treaty negotiations cannot be predicted. Other Legislative Initiatives: In recent years, various members of the United States Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would subject cigarettes to various regulations under the HHS or regulation under the Consumer Products Safety Act, establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities, further restrict the advertising of cigarettes, require additional warnings, including graphic warnings, on packages and in advertising, eliminate or reduce the tax deductibility of tobacco advertising, provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under state statutory or common law, and allow state and local governments to restrict the sale and distribution of cigarettes. Legislative initiatives affecting the regulation of the tobacco industry have also been considered in a number of jurisdictions outside the United States. In 2001, the EU issued a directive on tobacco product regulation that, among other things, reduces maximum permitted levels of tar, nicotine and carbon monoxide yields to 10, 1 and 10 milligrams, respectively, requires manufacturers to disclose ingredients and toxicological data on ingredients, requires health warnings on the front of a pack that cover at least 30% of the front panel and 14 rotational warnings that cover no less than 40% of the back panel, requires the health warnings to be surrounded by a black border, requires the printing of tar, nicotine and carbon monoxide numbers on the side panel of the pack at a minimum size of 10% of the side panel, and as described above, prohibits the use of texts, names, trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others. The EU member states are in the process of drafting and adopting legislation that will implement the provisions of the directive. The European Commission is also considering a new directive that would further restrict tobacco marketing and advertising in the EU. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions. In August 2000, New York State enacted legislation that requires the State's Office of Fire Prevention and Control to promulgate by January 1, 2003, fire-safety standards for cigarettes sold in New York. The legislation requires that cigarettes sold in New York stop burning within a time period to be specified by the standards or meet other performance standards set by the Office of Fire Prevention and Control. All cigarettes sold in New York will be required to meet the established standards within 180 days after the standards are promulgated. It is not possible to predict the impact of this law on PM Inc. until the standards are published. Similar legislation is being considered in other states and localities and at the federal level, as well as in jurisdictions outside the United States. It is not possible to predict what, if any, additional foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM Inc., Philip Morris International and the Company could be materially adversely affected. -31- Governmental Investigations: From time to time, the Company is subject to governmental investigations on a range of matters. During 2001, the competition authorities in Italy and Turkey initiated separate investigations into business activities among participants in the cigarette markets of those countries. The order initiating the Italian investigation named the Company and certain of its affiliates as well as all other parties purportedly engaged in the sale of cigarettes in Italy, including the Italian state tobacco monopoly. The Turkish investigation is directed at one of the Company's Turkish affiliates and another cigarette manufacturer. Also in 2001, authorities in Australia initiated an investigation into the use of descriptors, alleging that their use was false and misleading. The investigation is directed at one of the Company's Australian affiliates and other cigarette manufacturers. Similarly, in 2002, the Italian authorities, at the request of a consumer group, initiated an investigation into the use of descriptors for Marlboro Lights. The investigation is directed at the Company's German and Dutch affiliates, which manufacture product for sale in Italy. While it is not possible to predict the outcome of these governmental investigations, the Company and its affiliates believe they have meritorious responses to the matters being investigated. They are cooperating with the investigations and are prepared to vigorously contest any findings of unlawful conduct that may result from the investigations. Tobacco-Related Litigation: There is substantial litigation pending related to tobacco products in the United States and certain foreign jurisdictions, including the Engle class action case in Florida, in which PM Inc. is a defendant, and a civil health care cost recovery action filed by the United States Department of Justice in September 1999 against domestic tobacco manufacturers and others, including PM Inc. and the Company. (See Note 7 for a discussion of such litigation.) State Settlement Agreements: As discussed in Note 7, during 1997 and 1998, PM Inc. and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlements provide for substantial annual payments. They also place numerous restrictions on the tobacco industry's conduct of its business operations, including restrictions on the advertising and marketing of cigarettes. Among these are restrictions or prohibitions on the following: targeting youth; use of cartoon characters; use of brand name sponsorships and brand name non-tobacco products; outdoor and transit brand advertising; payments for product placement; and free sampling. In addition, the settlement agreements require companies to affirm corporate principles to reduce underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry's ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations. -32- Operating Results
For the Three Months Ended March 31, -------------------------------------------------------------- Operating Net Revenues Companies Income ------------------------- ------------------------ (in millions) 2002 2001 2002 2001 ------- ------- ------ ------ Domestic tobacco $ 5,018 $ 4,577 $1,250 $ 702 International tobacco 7,034 6,971 1,564 1,558 ------- ------- ------ ------ Total tobacco $12,052 $11,548 $2,814 $2,260 ======= ======= ====== ======
Domestic tobacco. During the first quarter of 2002, PM Inc.'s net revenues, which include excise taxes billed to customers, increased $441 million (9.6%) over the comparable 2001 period, due primarily to higher pricing ($354 million, including $120 million related to the January 1, 2002 federal excise tax increase) and higher volume ($82 million). Operating companies income for the first quarter of 2002 increased $548 million (78.1%) over the comparable 2001 period, due primarily to the 2001 litigation related expense ($500 million), price increases, net of cost increases ($202 million) and higher volume ($64 million), partially offset by higher marketing, administration and research costs ($216 million, primarily marketing). Excluding the impact of the 2001 litigation related expense, operating companies income increased 4.0%. As reported by Management Science Associates, shipment volume for the domestic tobacco industry during the first quarter of 2002 increased to 101.3 billion units, a 2.9% increase over the first quarter of 2001. PM Inc.'s shipment volume for the first quarter of 2002 was 52.3 billion units, an increase of 1.3% over the comparable 2001 period. Both the industry and PM Inc.'s shipment volumes for the quarter were positively affected by wholesalers' decisions to rebuild inventory levels after the January 1, 2002 increase in the federal excise tax rate. It should be noted that Management Science Associates' current measurements of the domestic cigarette industry's total shipments may not include all shipments of some manufacturers that use nontraditional channels that Management Science Associates is presently unable to monitor effectively. PM Inc. continues to estimate that industry volume declined at an annual rate of 1.0% to 2.0%. For the first quarter of 2002, PM Inc.'s market share was 51.6%, a decrease of 0.8 share points from the comparable period of 2001, due primarily to the year-over-year timing of promotional shipments by PM Inc. -33- and its competitors. Marlboro shipment volume increased 1.4 billion units (3.7%) over the first quarter of 2001 to 40.7 billion units for a 40.2% share of the total industry, an increase of 0.3 share points over the comparable period of 2001. Based on shipments, the premium segment accounted for approximately 74.5% of the domestic cigarette industry volume in the first quarter of 2002, a decrease of 0.1 share points from the comparable period of 2001. In the premium segment, PM Inc.'s volume increased 2.2% during the first quarter of 2002, compared with a 2.6% increase for the industry, resulting in a premium segment share of 62.7%, a decrease of 0.2 share points from the first quarter of 2001 related primarily to the year-over-year timing of promotional shipments of PM Inc. and its competitors. In the discount segment, PM Inc.'s shipments decreased 5.9% to 5.0 billion units in the first quarter of 2002, compared with an industry increase of 3.7%, resulting in a discount segment share of 19.5%, a decrease of 1.9 share points from the comparable period of 2001. Basic shipment volume for the first quarter of 2002 was down 1.1% to 4.7 billion units, for an 18.3% share of the discount segment, down 0.9 share points compared to the first quarter of 2001, due primarily to increased competitive promotional activity. According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail decreased 0.2 share points to 50.7% for the first quarter of 2002. The first quarter of 2002 retail share for Marlboro increased 0.5 share points to 38.5% and PM Inc.'s retail share of the premium segment grew 0.8 share points to 62.2%. Retail share for Basic, PM Inc.'s major discount brand, was flat at 5.1%. In March 2002, PM Inc. announced a price increase of $6.00 per thousand cigarettes on its domestic premium and discount brands. This price increase is effective April 1, 2002. In October 2001, PM Inc. announced a price increase of $2.50 per thousand cigarettes on its domestic premium and discount brands. This followed a price increase of $7.00 per thousand in April 2001. Each $1.00 per thousand increase by PM Inc. equates to a $0.02 increase in the price to wholesalers of each pack of twenty cigarettes. PM Inc. cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s shipments may be materially adversely affected by price increases including those related to tobacco litigation settlements and by increased excise taxes or other tobacco legislation discussed under the caption "Tobacco--Business Environment." International tobacco. During the first quarter of 2002, international tobacco net revenues, which include excise taxes billed to customers, increased $63 million (0.9%) over the first quarter of 2001. Excluding excise taxes, net revenues increased $74 million (2.0%), due primarily to higher volume/mix ($190 million) and price increases ($90 million), partially offset by unfavorable currency movements ($246 million). Operating companies income for the first quarter of 2002 increased $6 million (0.4%) over the comparable 2001 period, due primarily to price increases and higher volume/mix ($79 million), partially offset by unfavorable currency movements ($178 million). PMI's volume for the first quarter of 2002 of 184.0 billion units increased 4.3 billion units (2.4%) over the first quarter of 2001 due primarily to volume increases in Eastern Europe, Asia and the Middle East, partially offset by the timing of shipments and distortions in trade purchasing patterns in the Czech Republic, Hungary, Spain and Thailand, and economic weakness in Egypt, Romania and worldwide duty-free. Volume advanced in a number of important markets, including Austria, Belgium, France, Portugal, the Netherlands, the United Kingdom, the Middle East and Africa, Russia, the Ukraine, Indonesia, Korea, Japan, the Philippines, Taiwan, Argentina, Brazil and Mexico. In Germany, volume was flat and share was stable for the third consecutive quarter, indicating that the growth of trade brands is beginning to moderate. In Poland, volume was lower due to intense price competition. International volume for Marlboro decreased 1.2%, as lower volumes in Spain, Poland, the Czech Republic, Russia, Turkey, Egypt and Argentina, and lower worldwide duty-free shipments -34- were partially offset by higher volumes in Japan, the United Kingdom, the Ukraine, Korea and Indonesia. PMI recorded market share gains in many of its major markets. Food Business Environment Kraft, the largest branded food and beverage company headquartered in the United States, conducts its global business through two subsidiaries. A wide variety of snacks, beverages, cheese, grocery products and convenient meals are manufactured and marketed in the United States, Canada and Mexico by KFNA. Subsidiaries and affiliates of Kraft Foods International, Inc. ("KFI") manufacture and market a wide variety of snacks, beverages, cheese, grocery products and convenient meals in Europe, the Middle East and Africa, as well as the Latin America and Asia Pacific regions. KFNA and KFI are subject to fluctuating commodity costs, currency movements and competitive challenges in various product categories and markets, including a trend toward increasing consolidation in the retail trade and consequent inventory reductions, and changing consumer preferences. In addition, certain competitors may have different profit objectives and some international competitors may be less susceptible to currency exchange rates. To confront these challenges, Kraft continues to take steps to build the value of its brands and improve its food business portfolio with new product and marketing initiatives. Fluctuations in commodity costs can cause retail price volatility, intensify price competition and influence consumer and trade buying patterns. The North American and international food businesses are subject to fluctuating commodity costs, including dairy, coffee bean and cocoa costs. Dairy commodity costs on average have been higher than those incurred in the first quarter of 2001. Cocoa bean prices have also been higher, while coffee bean prices have been lower than in 2001. On December 11, 2000, the Company, through Kraft, acquired all of the outstanding shares of Nabisco. During 2001, certain Nabisco businesses were reclassified to businesses held for sale, including their estimated results of operations through anticipated sale dates. These businesses have subsequently been sold with the exception of one business that had been held for sale since the acquisition of Nabisco. This business has been included in 2002 reported operating results. The closure of a number of Nabisco domestic and international facilities resulted in severance and other exit costs of $379 million, which were included in the adjustments for the allocation of the Nabisco purchase price. The closures will result in the termination of approximately 7,500 employees and will require total cash payments of $373 million, of which approximately $100 million has been spent through March 31, 2002. Substantially all of the closures will be completed by the end of 2002. The integration of Nabisco into the operations of Kraft will also result in the closure or reconfiguration of several existing Kraft facilities. The aggregate charges to the consolidated statement of earnings to close or reconfigure facilities and integrate Nabisco are estimated to be in the range of $200 million to $300 million. KFNA incurred pre-tax integration costs of $27 million during the first quarter of 2002, in addition to $53 million incurred during the third and fourth quarter of 2001. During the first quarter of 2002, approximately 700 employees accepted the benefits offered by a voluntary retirement program and elected to retire or terminate employment. As a result, Kraft recorded a pre-tax charge of $142 million related to the voluntary retirement program. As of March 31, 2002, Kraft had recorded cumulative pre-tax charges of $222 million related to these actions. During the first quarter of 2002, KFI acquired a biscuit company in Australia for an aggregate cost of $62 million. During the first quarter of 2001, KFI purchased coffee businesses in Romania and Morocco. The operating results of the businesses acquired were not material to the consolidated operating results of KFI or the Company in any of the periods presented. During the first quarter of 2002, KFNA sold several North American food businesses, which were previously classified as businesses held for sale, for $81 million. The operating results of the businesses divested were not -35- material to KFNA's or the Company's consolidated financial position or results of operations in any of the periods presented. Operating Results
For the Three Months Ended March 31, ------------------------------------------------------------- Operating Net Revenues Companies Income ------------------------ ------------------------ (in millions) 2002 2001 2002 2001 ------ ------ ------ ------ North American food $5,294 $5,234 $1,098 $1,143 International food 1,853 1,963 252 239 ------ ------ ------ ------ Total food $7,147 $7,197 $1,350 $1,382 ====== ====== ====== ======
North American food. During the first quarter of 2002, net revenues increased $60 million (1.1%) over the first quarter of 2001, due primarily to higher pricing ($43 million) and higher volume/mix. Excluding the businesses divested since the beginning of 2001 and adjusting for businesses held for sale, net revenues increased 1.5%. Operating companies income for the first quarter of 2002 decreased $45 million (3.9%) from the comparable period of 2001, due primarily to a pre-tax charge for the voluntary retirement program ($135 million) and higher dairy commodity costs, partially offset by lower marketing, administration and research costs ($102 million, the majority of which related to lower marketing expenses and synergy savings) and higher volume/mix. Excluding the 2002 pre-tax charge for the voluntary retirement programs, the 2002 pre-tax charge for integration costs ($27 million) and a 2001 loss on the sale of a food factory ($29 million), as well as the impact of businesses divested since the beginning of 2001 and businesses held for sale, operating companies income increased 7.2%. Volume for the first quarter of 2002 increased 5.3% over the comparable period for 2001. Excluding the impact of businesses divested and after adjusting for businesses held for sale (the basis of presentation for all of the following KFNA volume comparisons), volume increased 2.5%. In Cheese, Meals and Enhancers, volume decreased due primarily to lower food service volume reflecting weakness in the food service industry, as well as the exit of non-branded businesses, partially offset by higher shipments of natural cheese, process cheese loaves and macaroni & cheese dinners, and the 2001 acquisition of It's Pasta Anytime. Volume decreased in Biscuits, Snacks and Confectionery, driven primarily by lower shipments of biscuits and the timing of shipments of non-chocolate confectionery products, partially offset by higher shipments of snack nuts to non-grocery channels. Volume gains were achieved in Beverages, Desserts and Cereals, driven primarily by ready-to-drink beverages, coffee and desserts, partially offset by the timing of shipments in cereals. In Oscar Mayer and Pizza, volume increased in hot dogs, bacon, luncheon meats, lunch combinations, soy-based meat alternatives and frozen pizza. International food. Net revenues for the first quarter of 2002 decreased $110 million (5.6%) from the first quarter of 2001. Excluding businesses divested since the beginning of 2001 and after adjusting for businesses held for sale, net revenues decreased $107 million (5.5%), due primarily to unfavorable currency movements ($129 million) and lower pricing ($26 million, due primarily to coffee commodity-related price reductions), partially offset by the impact of acquisitions. Operating companies income for the first quarter of 2002 increased $13 million (5.4%) over the first quarter of 2001. Excluding a 2002 pre-tax charge for the voluntary retirement programs ($7 million), operating companies income increased $20 million (8.4%), due primarily to lower marketing, administration and research costs ($43 million), partially offset by lower margins ($16 million) and unfavorable currency movements ($6 million). -36- Volume for the first quarter of 2002 increased 0.9% over the first quarter of 2001. Excluding the impact of divested businesses and after adjusting for the impact of businesses held for sale (the basis of presentation for all of the following KFI volume comparisons), volume increased 2.5%. In Europe, Middle East and Africa, volume increased over the first quarter of 2001, due primarily to growth in several countries across the region. In beverages, volume increased in both coffee and refreshment beverages. Coffee volume grew in Germany, Sweden, Poland and the Ukraine, and benefited from acquisitions in Romania, Morocco and Bulgaria. Refreshment beverage volume increased, driven by higher sales to the Middle East, the Czech Republic and Turkey. Snacks volume increased, driven by recent confectionery acquisitions in Russia and Poland, and higher salty snacks in the Nordic area and Central and Eastern Europe. Cheese volume decreased, due primarily to increased price competition in Europe, partially offset by gains in the Middle East. In grocery, volume increased, due primarily to higher spoonable dressings volume in Italy and Spain, and higher shipments of ready-to-serve desserts and pourable dressings in the United Kingdom. Volume for convenient meals also increased, due primarily to lunch combinations in the United Kingdom and higher shipments of canned meats in Italy against a weak comparison in 2001. Volume increased in the Latin American and Asia Pacific region driven by gains in many markets in Latin America, partially offset by declines in Argentina, Venezuela and several Asian markets due to the impact of weak economies. Beverages volume increased, due primarily to growth in powdered soft drinks in most markets and coffee in China. Cheese volume decreased, due primarily to price competition in Australia and lower sales in Japan and the Caribbean, partially offset by higher cheese volume in the Philippines. Grocery volume was lower, due primarily to economic weakness in Argentina and Venezuela. Snacks volume increased, driven primarily by confectionery and biscuit growth in Brazil, biscuit growth in Peru, and an acquisition in Australia, partially offset by lower volume in Argentina, Venezuela and China. The Company expects continued erosion of the economic climate in Argentina to negatively affect results during the remainder of 2002. Beer - ---- Business Environment The domestic beer industry is intensely competitive, with the major methods of competition being product quality, price, distribution, marketing and advertising. The Company's beer business, Miller Brewing Company ("Miller"), has lost market share in recent years. Miller has instituted actions to increase the equity of its brands and focus on premium brands with the highest growth potential. These actions include an emphasis on advertising and promotion of its premium brands, exiting certain licenses to brew brands for domestic distribution, reducing inventory on hand at distributors and pursuing opportunities in the growing flavored malt beverages category. During the first quarter of 2002, Miller entered into agreements with Skyy Spirits LLC, Allied Domecq Spirits and Wine USA Inc. and a subsidiary of Brown-Forman Corp. to launch a range of new flavored malt beverages. The agreement with Skyy Spirits resulted in the introduction of Skyy Blue(TM), a flavored malt beverage with a citrus flavor during the first quarter of 2002. The agreement with Allied Domecq calls for the creation of flavored malt beverages based on Allied Domecq's popular Stolichnaya(TM) vodka and Sauza(TM) tequila brands while the agreement with Brown-Forman calls for the introduction of flavored malt beverages based on its popular Jack Daniel's(TM) brand. As previously announced, the Company is in discussion with a third party regarding a potential transaction involving Miller. These discussions are continuing and there is no certainty that they will lead to an agreement. Operating Results Net revenues for the first quarter of 2002 increased $105 million (9.4%) over the first quarter of 2001, due primarily to higher pricing ($41 million), higher volume ($23 million) and increased contract brewing revenues. Operating companies income for the first quarter of 2002 decreased $17 million (13.7%) from the first quarter of 2001. Excluding pre-tax charges for an asset impairment and the voluntary retirement program, operating companies income increased $6 million (4.8%) to $130 million, due primarily to higher pricing ($21 million), higher volume ($7 million) and increased contract brewing, partially offset by higher marketing, administration and research costs ($30 million). -37- Domestic shipment volume of 9.5 million barrels for the first quarter of 2002 increased 1.6% over the first quarter of 2001. The majority of Miller's increase in domestic shipments was due to higher shipments for core brands and the 2002 introduction of Skyy Blue(TM), partially offset by lower shipments of lower-priced, non-core brands. Total wholesalers' sales to retailers decreased 2.6% from the comparable 2001 period, reflecting lower retail sales of Miller Lite, Miller Genuine Draft, Icehouse, Milwaukee's Best, Red Dog and Meister Brau. Financial Services - ------------------ Philip Morris Capital Corporation's ("PMCC") net revenues and operating companies income for the first quarter of 2002 increased $17 million (17.0%) and $7 million (10.9%), respectively, over the first quarter of 2001. These increases were due primarily to growth in leasing activities and continued gains derived from PMCC's asset portfolio. Additionally, operating companies income benefited from lower interest rates. Financial Review - ---------------- Net Cash Provided by Operating Activities - ----------------------------------------- During the first quarter of 2002, net cash provided by operating activities was $1.1 billion compared with $557 million during the comparable 2001 period. The increase is due primarily to higher net earnings and a lower use of cash to maintain working capital. Net Cash Used in Investing Activities - ------------------------------------- During the first quarter of 2002, net cash used in investing activities was $290 million, compared with $634 million during the first quarter of 2001. The decrease reflects lower levels of cash used for acquisitions and $81 million of cash provided by the 2002 divestiture of several North American food businesses. Net Cash Used in Financing Activities - ------------------------------------- During the first quarter of 2002, net cash used in financing activities was $857 million, compared with $458 million during the first quarter of 2001. This difference was due primarily to higher repayments of debt in 2002 and an increase in cash used during 2002 to repurchase Philip Morris common stock and pay dividends on Philip Morris common stock. Debt and Liquidity - ------------------ Debt - The Company's total debt (consumer products and financial services) was $23.3 billion and $22.1 billion at March 31, 2002 and December 31, 2001, respectively. Total consumer products debt was $21.3 billion and $20.1 billion at March 31, 2002 and December 31, 2001, respectively. At March 31, 2002 and December 31, 2001, the Company's ratio of consumer products debt to total equity was 1.08 and 1.02, respectively. The ratio of total debt to total equity was 1.18 and 1.13 at March 31, 2002 and December 31, 2001, respectively. In April 2002, Kraft filed a Form S-3 shelf registration statement with the Securities and Exchange Commission, under which Kraft may sell debt securities and/or warrants to purchase debt securities in one or more offerings up to a total amount of $5.0 billion. The future proceeds from the sale of the offered securities will be used by Kraft to refinance maturing indebtedness and for general corporate purposes. Credit Facilities - The Company and its subsidiaries maintain credit facilities with a number of lending institutions, amounting to approximately $16.2 billion. Certain of these credit facilities were used to support $5.9 billion of commercial paper borrowings at March 31, 2002, the proceeds of which were used for general corporate purposes. The Company's credit facilities include $7.0 billion (of which $2.0 billion is for the sole use of Kraft) of 5-year revolving credit facilities expiring in July 2006, and $7.0 billion (of which $4.0 billion is for the sole use of Kraft) of 364-day revolving credit facilities expiring in July 2002. The Philip Morris facilities require the maintenance of a fixed charges coverage ratio and the Kraft facilities require the -38- maintenance of a minimum net worth. Philip Morris and Kraft exceeded these covenants at March 31, 2002 and do not currently anticipate any difficulty in continuing to exceed these covenant requirements. The foregoing revolving credit facilities do not include any other covenants that could require an acceleration of maturity or the posting of collateral. The majority of the Company's remaining facilities expire within one year. The 5-year revolving credit facilities enable the Company to reclassify short-term debt on a long-term basis. At March 31, 2002, approximately $4.9 billion of short-term borrowings that the Company intends to refinance were reclassified as long-term debt, as compared with $3.5 billion at December 31, 2001. The Company expects to continue to refinance long-term and short-term debt from time to time. The nature and amount of the Company's long-term and short-term debt and the proportionate amount of each can be expected to vary as a result of future business requirements, market conditions and other factors. Guarantees - At March 31, 2002, the Company was contingently liable for guarantees and commitments of $1.1 billion, consisting of the following: o $0.8 billion of guarantees of excise tax and import duties related to international shipments of tobacco products. In these agreements, a bank provides a guarantee of tax payments to respective governments. PMI then issues a guarantee to the respective banks for the payment of the taxes. These are revolving facilities that are integral to the shipment of tobacco products in international markets, and the underlying taxes payable are recorded on the Company's consolidated balance sheet. o $0.2 billion, primarily surety bonds, related to government approval of production changes at an international tobacco facility. The surety bonds expire in 2002. o $0.1 billion, including commitments to purchase leaf tobacco from the United States. PM Inc.'s current leaf commitment expires in 2003. Although these guarantees are typically short-term in nature, they are expected to be replaced, upon expiration, with similar guarantees of similar amounts. Guarantees do not have, and are not expected to have, a significant impact on the Company's liquidity. Litigation Escrow Deposits - As discussed in Note 7. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among PM Inc., certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, a $500 million pre-tax charge was recorded in marketing, administration and research costs in the domestic tobacco segment for the quarter ended March 31, 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the March 31, 2002 and December 31, 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in the consolidated statement of earnings. Tobacco Litigation Settlement Payments - As discussed in Note 7. Contingencies, PM Inc., along with other domestic tobacco companies, has entered into tobacco litigation settlement agreements that require the domestic tobacco industry to make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as an additional $250 million each year in 2002 and 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll- -39- your-own cigarettes, in the year preceding that in which the payment is due. Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (in 2002 through 2008, $500 million each year; and 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. During the quarters ended March 31, 2002 and 2001, PM Inc. recognized $1.5 billion in each quarter as part of cost of sales attributable to the foregoing settlement obligations. As discussed above under "Tobacco--Business Environment," the present legislative and litigation environment is substantially uncertain and could result in material adverse consequences for the business, financial condition, cash flows or results of operations of the Company, PM Inc. and PMI. Assuming there are no material adverse developments in the legislative and litigation environment, the Company expects its cash flow from operations and its access to global capital markets to provide sufficient liquidity to meet the ongoing needs of the business. Leveraged Leases - As part of its lease portfolio, PMCC invests in leveraged leases. At March 31, 2002, PMCC's net finance receivable of $7.1 billion in leveraged leases, which is included in the Company's consolidated balance sheet as finance assets, net, is comprised of total lease payments receivable ($26.1 billion) and the residual value of assets under lease ($2.7 billion), reduced by non-recourse third-party debt ($17.9 billion) and unearned income ($3.8 billion). PMCC has no obligation for the payment of the non-recourse third-party debt issued to purchase the assets under lease. The payment of the debt is collateralized only by lease payments receivable and the leased property, and is non-recourse to all other assets of PMCC or the Company. As required by accounting principles generally accepted in the United States of America ("U.S. GAAP"), the non-recourse debt has been offset against the related rentals receivable and the residual value of the property, and has been presented on a net basis within finance assets, net, in the Company's consolidated balance sheet at March 31, 2002. Equity and Dividends - -------------------- The Company repurchased 21.5 million of its common stock during the first quarter of 2002 and 2001, at a cost of $1.1 billion and $1.0 billion, respectively. At March 31, 2002, cumulative repurchases under its previously announced $10 billion authority totaled 91.1 million shares at an aggregate cost of $4.4 billion. Dividends paid in the first quarter of 2002 and 2001 were $1.25 billion and $1.17 billion, respectively, an increase of 6.6%, reflecting a higher dividend rate in 2002, partially offset by a lower number of shares outstanding as a result of ongoing share repurchases. During the third quarter of 2001, the Company's Board of Directors approved a 9.4% increase in the quarterly dividend rate to $0.58 per share. As a result, the present annualized dividend rate is $2.32 per share. Market Risk - ----------- The Company operates globally, with manufacturing and sales facilities in various locations around the world, and utilizes certain financial instruments to manage its foreign currency, interest rate and commodity exposures, which primarily relate to forecasted transactions and debt. Derivative financial instruments are used by the Company, principally to reduce exposures to market risks resulting from fluctuations in foreign exchange rates, -40- commodity prices and interest rates, by creating offsetting exposures. The Company is not a party to leveraged derivatives. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not use derivative financial instruments for speculative purposes. Substantially all of the Company's derivative financial instruments are effective as hedges under U.S. GAAP. Accordingly, the Company decreased accumulated other comprehensive losses by $42 million during the first quarter of 2002. This reflects deferred losses transferred to earnings of $92 million, partially offset by a decrease in the fair value of derivatives during the first quarter of 2002 of $50 million. The fair value of all derivative financial instruments has been calculated based on active market quotes. Foreign exchange rates. The Company uses forward foreign exchange contracts and foreign currency options to mitigate its exposure to changes in exchange rates from third-party and intercompany forecasted transactions. The primary currencies to which the Company is exposed include the Japanese yen, Swiss franc and the euro. At March 31, 2002 and December 31, 2001, the Company had option and forward foreign exchange contracts with aggregate notional amounts of $4.6 billion and $3.7 billion, respectively, for the purchase or sale of foreign currencies. The Company uses foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. Foreign currency swap agreements are accounted for as cash flow hedges. At March 31, 2002 and December 31, 2001, the notional amounts of foreign currency swap agreements aggregated $2.3 billion. The Company also uses certain foreign currency denominated debt as net investment hedges of foreign operations. During the quarter ended March 31, 2002, a gain of $1 million, net of income taxes, which represented effective hedges of net investments, was reported as a component of accumulated other comprehensive earnings (losses) within currency translation adjustments. Commodities. The Company is exposed to price risk related to forecasted purchases of certain commodities used as raw materials by the Company's businesses. Accordingly, the Company uses commodity forward contracts, as cash flow hedges, primarily for coffee, cocoa, milk, cheese and wheat. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa, wheat, corn, sugar and soybean oil. At March 31, 2002 and December 31, 2001, the Company had net long commodity positions of $603 million and $589 million, respectively. Interest rates. The Company uses interest rate swaps to hedge the fair value of an insignificant portion of its long-term debt. The differential to be paid or received is accrued and recognized as interest expense. If an interest rate swap agreement is terminated prior to maturity, the realized gain or loss is recognized over the remaining life of the agreement if the hedged amount remains outstanding, or immediately if the underlying hedged exposure does not remain outstanding. If the underlying exposure is terminated prior to the maturity of the interest rate swap, the unrealized gain or loss on the related interest rate swap is recognized in earnings currently. During the quarter ended March 31, 2002, there was no ineffectiveness relating to these fair value hedges. At March 31, 2002, the Company had interest rate swap agreements which converted $102 million of fixed-rate debt to variable-rate debt, of which $29 million will mature in 2003 and $73 million will mature in 2004. -41- ----------------- Use of the above-mentioned financial instruments has not had a material impact on the Company's financial position at March 31, 2002 and December 31, 2001, or the Company's results of operations for the three months ended March 31, 2002 or the year ended December 31, 2001. ----------------- Contingencies - ------------- See Note 7 to the Condensed Consolidated Financial Statements for a discussion of contingencies. New Accounting Standards - ------------------------ On January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, the Company stopped recording the amortization of goodwill and indefinite life intangible assets as a charge to earnings during the first quarter of 2002. The Company estimates that net earnings and diluted EPS would have been approximately $2.0 billion and $0.91, respectively, for the quarter ended March 31, 2001, had the provisions of the new standards been applied as of January 1, 2001. In addition, the Company is required to conduct an annual review of goodwill and intangible assets for potential impairment. The Company completed its review and did not have to record a charge to earnings for an impairment of goodwill or other intangible assets as a result of these new standards. Effective January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on the Company's financial position, results of operations or cash flows. Effective January 1, 2002, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." The adoption of EITF Issues No. 00-14 and No. 00-25 resulted in a reduction of revenues of approximately $2.4 billion in the first quarter of 2001. Marketing, administration and research costs were reduced in the first quarter of 2001 by approximately $2.6 billion. Cost of sales increased in the first quarter of 2001 by approximately $145 million and excise taxes on products increased by approximately $56 million. The adoption of these EITF Issues had no impact on net earnings or basic and diluted EPS. The adoption of EITF Issues No. 00-14 and No. 00-25 resulted in restated 2001 quarterly reported net revenues by segment as follows (in millions):
2001 -------------------------------------------------------------- First Second Third Fourth ------- ------- ------- ------- Domestic tobacco $ 4,577 $ 5,105 $ 5,144 $ 5,076 International tobacco 6,971 6,750 6,742 6,054 North American food 5,234 5,428 5,151 5,157 International food 1,963 2,045 1,867 2,389 Beer 1,114 1,350 1,235 1,092 Financial services 100 111 110 114 ------- ------- ------- ------- Net revenues $19,959 $20,789 $20,249 $19,882 ======= ======= ======= =======
-42- Excluding the impact of businesses divested and held for sale, restated 2001 quarterly net revenues by segment is as follows (in millions):
2001 -------------------------------------------------------------- First Second Third Fourth ------- ------- ------- ------- Domestic tobacco $ 4,577 $ 5,105 $ 5,144 $ 5,076 International tobacco 6,971 6,750 6,742 6,054 North American food 5,217 5,547 5,201 5,245 International food 1,960 2,050 1,869 2,381 Beer 1,114 1,350 1,235 1,092 Financial services 100 111 110 114 ------- ------- ------- ------- Net revenues $19,939 $20,913 $20,301 $19,962 ======= ======= ======= =======
Forward-Looking and Cautionary Statements - ----------------------------------------- The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders, including this Quarterly Report on Form 10-Q. One can identify these forward-looking statements by use of words such as "strategy," "expects," "continues," "plans," "anticipates," "believes," "will," "estimates," "intends," "projects," "goals," "targets" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results and outcomes to differ materially from those contained in any forward-looking statement made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements. The tobacco industry continues to be subject to health concerns relating to the use of tobacco products and exposure to ETS; legislation, including actual and potential excise tax increases; increasing marketing and regulatory restrictions; governmental regulation; privately imposed smoking restrictions; governmental and grand jury investigations; litigation, including risks associated with adverse jury and judicial determinations, courts reaching conclusions at variance with the Company's understanding of applicable law, bonding requirements and the absence of adequate appellate remedies to get timely relief from any of the foregoing; and the effects of price increases related to concluded tobacco litigation settlements and excise tax increases on consumption rates. The food industry continues to be subject to recalls if products become adulterated or misbranded; liability if product consumption causes injury; ingredient disclosure and labeling laws and regulations; and the possibility that consumers could lose confidence in the safety and quality of certain food products. Each of the Company's consumer products subsidiaries is subject to intense competition, changes in consumer preferences and local economic conditions. Their results are dependent upon their continued ability to promote brand equity successfully; to anticipate and respond to new consumer trends; to develop new products and markets and to broaden brand portfolios in order to compete effectively with lower priced products in a consolidating environment at the retail and manufacturing levels; to improve productivity; and to respond to changing prices for their raw materials. In addition, PMI, KFI and KFNA are subject to the effects of foreign economies and the related shifts in consumer preferences, currency movements and fluctuations in levels of customer inventories. Developments in any of these areas, which are more fully described above and which descriptions are incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. -43- Part II - OTHER INFORMATION Item 1. Legal Proceedings. See Note 7. Contingencies, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a discussion of legal proceedings pending against the Company and its subsidiaries. See also Exhibits 99.1 and 99.2 to this report. Item 4. Submission of Matters to a Vote of Security Holders. The Company's annual meeting of stockholders was held in Richmond, Virginia on April 25, 2002. 1,807,100,817 shares of Common Stock, 84.2% of outstanding shares, were represented in person or by proxy. The fifteen directors listed below were elected to a one-year term expiring in 2003. Geoffrey C. Bible and William H. Webb will step down from the Company's Board of Directors in August 2002.
Number of Shares ------------------------------------------------- For Withheld ------------- ---------- Elizabeth E. Bailey 1,790,884,115 16,216,702 Geoffrey C. Bible 1,792,259,709 14,841,108 Harold Brown 1,791,174,722 15,926,095 Louis C. Camilleri 1,792,448,335 14,652,482 Jane Evans 1,791,207,054 15,893,763 J. Dudley Fishburn 1,791,219,213 15,881,604 Robert E. R. Huntley 1,791,522,527 15,578,290 Thomas W. Jones 1,790,940,623 16,160,194 Billie Jean King 1,789,057,708 18,043,109 John D. Nichols 1,791,803,735 15,297,082 Lucio A. Noto 1,790,590,137 16,510,680 John S. Reed 1,790,893,969 16,206,848 Carlos Slim Helu 1,786,318,179 20,782,638 William H. Webb 1,791,998,190 15,102,627 Stephen M. Wolf 1,789,981,943 17,118,874
The selection of PricewaterhouseCoopers LLP as independent accountants was approved: 1,755,750,564 shares voted in favor; 38,806,337 shares voted against and 12,543,916 shares abstained. The Company received stockholder approval to amend its restated articles of incorporation to change its name from Philip Morris Companies Inc. to Altria Group, Inc. with 1,707,959,012 shares voted in favor; 83,947,731 shares voted against and 15,194,074 shares abstained. The three stockholder proposals were defeated: Stockholder Proposal 1 - Inserts Disclosing Personal And Social Effects Related To Using Our Company's Tobacco Products: 72,283,776 shares voted in favor; 1,388,777,086 shares voted against and 346,039,955 shares abstained (including broker non-votes). Stockholder Proposal 2 - Environmental Tobacco Smoke: 72,970,946 shares voted in favor; 1,387,318,868 shares voted against and 346,811,003 shares abstained (including broker non-votes). Stockholder Proposal 3 - Global Human Rights Standards: 75,640,363 shares voted in favor; 1,337,386,019 shares voted against and 394,074,435 shares abstained (including broker non-votes). -44- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3 Amended By-Laws. 12 Statement regarding computation of ratios of earnings to fixed charges. 99.1 Certain Pending Litigation Matters and Recent Developments. 99.2 Trial Schedule for Certain Cases. (b) Reports on Form 8-K. The Registrant filed a Current Report on Form 8-K on January 30, 2002 covering Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) containing the Company's consolidated financial statements as of and for the year ended December 31, 2001. -45- Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHILIP MORRIS COMPANIES INC. /s/ DINYAR S. DEVITRE Dinyar S. Devitre, Senior Vice President and Chief Financial Officer May 13, 2002 -46- EX-3 3 ex3.txt EXHIBIT 3 Exhibit 3 BY-LAWS of PHILIP MORRIS COMPANIES INC. ARTICLE I Meetings of Stockholders Section 1. Annual Meetings. - The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting, and any postponement or adjournment thereof, shall be held on such date and at such time as the Board of Directors may in its discretion determine. Section 2. Special Meetings. - Unless otherwise provided by law, special meetings of the stockholders may be called by the chairman of the Board of Directors, or in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, an executive vice president or by order of the Board of Directors, whenever deemed necessary. Section 3. Place of Meetings. - All meetings of the stockholders shall be held at such place in the Commonwealth of Virginia as from time to time may be fixed by the Board of Directors. Section 4. Notice of Meetings. - Notice, stating the place, day and hour and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting (except as a different time is specified herein or by law), to each stockholder of record having voting power in respect of the business to be transacted thereat. Notice of a stockholders' meeting to act on an amendment of the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of all, or substantially all of the Corporation's assets, otherwise than in the usual and regular course of business, or the dissolution of the Corporation shall be given not less than twenty-five nor more than sixty days before the date of the meeting and shall be accompanied, as appropriate, by a copy of the proposed amendment, plan of merger or share exchange or sale agreement. April 24, 2002 -1- Notwithstanding the foregoing, a written waiver of notice signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A stockholder who attends a meeting shall be deemed to have (i) waived objection to lack of notice or defective notice of the meeting, unless at the beginning of the meeting he or she objects to holding the meeting or transacting business at the meeting, and (ii) waived objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless he or she objects to considering the matter when it is presented. Section 5. Quorum. - At all meetings of the stockholders, unless a greater number or voting by classes is required by law, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, action on a matter is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation, and except that in elections of directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Less than a quorum may adjourn. Section 6. Organization and Order of Business. - At all meetings of the stockholders, the chairman of the Board of Directors or, in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, the most senior executive vice president, shall act as chairman. In the absence of all of the foregoing officers or, if present, with their consent, a majority of the shares entitled to vote at such meeting, may appoint any person to act as chairman. The secretary of the Corporation or, in the secretary's absence, an assistant secretary, shall act as secretary at all meetings of the stockholders. In the event that neither the secretary nor any assistant secretary is present, the chairman may appoint any person to act as secretary of the meeting. The chairman shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the dismissal of business not properly presented, the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls. At each annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who shall be entitled to -2- vote at such meeting and who complies with the notice procedures set forth in this Section 6. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice must be given, either by personal delivery or by United States certified mail, postage prepaid, and received at the principal executive offices of the Corporation (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation's proxy statement in connection with the last annual meeting of stockholders or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than 60 days before the date of the applicable annual meeting. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder proposing such business, (c) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to bring the business before the meeting specified in the notice, (d) the class and number of shares of stock of the Corporation beneficially owned by the stockholder and (e) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 6. The chairman of an annual meeting shall, if the facts warrant, determine that the business was not brought before the meeting in accordance with the procedures prescribed by this Section 6. If the chairman should so determine, he or she shall so declare to the meeting and the business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 6, a stockholder seeking to have a proposal included in the Corporation's proxy statement shall comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended (including, but not limited to, Rule 14a-8 or its successor provision). The secretary of the Corporation shall deliver each such stockholder's notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review. Section 7. Voting. - A stockholder may vote his or her shares in person or by proxy. Any proxy shall be delivered to the secretary of the meeting at or prior to the time designated by the chairman or in the order of business for so delivering such proxies. No proxy shall be valid after eleven months from its date, unless otherwise provided in the proxy. Each holder of record of stock of any class shall, as to all matters in respect of which stock of such class has voting power, be entitled to such vote as is provided in the Articles of Incorporation for each share of stock of such class standing -3- in the holders's name on the books of the Corporation. Unless required by statute or determined by the chairman to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting or by such stockholder's proxy, if there be such proxy. Section 8. Written Authorization. - A stockholder or a stockholder's duly authorized attorney-in-fact may execute a writing authorizing another person or persons to act for him or her as proxy. Execution may be accomplished by the stockholder or such stockholder's duly authorized attorney-in-fact or authorized officer, director, employee or agent signing such writing or causing such stockholder's signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. Section 9. Electronic Authorization. - The secretary or any vice president may approve procedures to enable a stockholder or a stockholder's duly authorized attorney-in-fact to authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of a telegram, cablegram, internet transmission, telephone transmission or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such transmission must either set forth or be submitted with information from which the inspectors of election can determine that the transmission was authorized by the stockholder or the stockholder's duly authorized attorney-in-fact. If it is determined that such transmissions are valid, the inspectors shall specify the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 9 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 10. Inspectors. - At every meeting of the stockholders for election of directors, the proxies shall be received and taken in charge, all ballots shall be received and counted and all questions concerning the qualifications of voters, the validity of proxies, and the acceptance or rejection of votes shall be decided, by two or more inspectors. Such inspectors shall be appointed by the chairman of the meeting. They shall be sworn faithfully to perform their duties and shall in writing certify to the returns. No candidate for election as director shall be appointed or act as inspector. -4- ARTICLE II Board of Directors Section 1. General Powers. - The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. Section 2. Number. - The number of directors shall be fifteen (15). Section 3. Term of Office and Qualification. - Each director shall serve for the term for which he or she shall have been elected and until a successor shall have been duly elected. Section 4. Nomination and Election of Directors. - At each annual meeting of stockholders, the stockholders entitled to vote shall elect the directors. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. Nominations of persons for election to the Board of Directors may be made by the Board of Directors or any committee designated by the Board of Directors or by any stockholder entitled to vote for the election of directors at the applicable meeting of stockholders who complies with the notice procedures set forth in this Section 4. Such nominations, other than those made by the Board of Directors or any committee designated by the Board of Directors, may be made only if written notice of a stockholder's intent to nominate one or more persons for election as directors at the applicable meeting of stockholders has been given, either by personal delivery or by United States certified mail, postage prepaid, to the secretary of the Corporation and received (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation's proxy statement in connection with the last annual meeting of stockholders, or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than 60 days before the date of the applicable annual meeting, or (iii) with respect to any special meeting of stockholders called for the election of directors, not later than the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such stockholder's notice shall set forth (a) as to the stockholder giving the notice, (i) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder, (ii) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to nominate the person or persons specified in the notice, (iii) the class and number of shares of stock of the Corporation beneficially owned by such stockholder, and (iv) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder; and (b) as to each person whom the stockholder proposes to nominate for -5- election as a director, (i) the name, age, business address and, if known, residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required by the rules and regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended, and (v) the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected. The secretary of the Corporation shall deliver each such stockholder's notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review. Any person nominated for election as director by the Board of Directors or any committee designated by the Board of Directors shall, upon the request of the Board of Directors or such committee, furnish to the secretary of the Corporation all such information pertaining to such person that is required to be set forth in a stockholder's notice of nomination. The chairman of the meeting of stockholders shall, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by this Section 4. If the chairman should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Section 5. Organization. - At all meetings of the Board of Directors, the chairman of the Board of Directors or, in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, the senior most executive vice president, shall act as chairman of the meeting. The secretary of the Corporation or, in the secretary's absence, an assistant secretary, shall act as secretary of meetings of the Board of Directors. In the event that neither the secretary nor any assistant secretary shall be present at such meeting, the chairman of the meeting shall appoint any person to act as secretary of the meeting. Section 6. Vacancies. - Any vacancy occurring in the Board of Directors, including a vacancy resulting from amending these By-Laws to increase the number of directors by thirty percent or less, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. Section 7. Place of Meeting. - Meetings of the Board of Directors, regular or special, may be held either within or without the Commonwealth of Virginia. Section 8. Organizational Meeting. - The annual organizational meeting of the Board of Directors shall be held immediately following adjournment of the annual meeting of stockholders and at the same place, without the requirement of any notice other than this provision of the By-Laws. -6- Section 9. Regular Meetings: Notice. - Regular meetings of the Board of Directors shall be held at such times and places as it may from time to time determine. Notice of such meetings need not be given if the time and place have been fixed at a previous meeting. Section 10. Special Meetings. - Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if any) or two of the directors. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each director, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held, or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Section 11. Waiver of Notice. - Whenever any notice is required to be given to a director of any meeting for any purpose under the provisions of law, the Articles of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless at the beginning of the meeting or promptly upon the director's arrival, he or she objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 12. Quorum and Manner of Acting. - Except where otherwise provided by law, a majority of the directors fixed by these By-Laws at the time of any regular or special meeting shall constitute a quorum for the transaction of business at such meeting, and the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of those present may adjourn the meeting from time to time until a quorum be had. Notice of any such adjourned meeting need not be given. Section 13. Order of Business. - At all meetings of the Board of Directors business may be transacted in such order as from time to time the Board of Directors may determine. Section 14. Committees. - In addition to the executive committee authorized by Article III of these By-Laws, other committees, consisting of two or more directors, may be designated by the Board of Directors by a resolution adopted by the greater number of (i) a majority of all directors in office at the time the action is being taken or (ii) the number of directors required to take action under Article II, Section 12 hereof. -7- Any such committee, to the extent provided in the resolution of the Board of Directors designating the committee, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, except as limited by law. ARTICLE III Executive Committee Section 1. How Constituted and Powers. - The Board of Directors, by resolution adopted pursuant to Article II, Section 14 hereof, may designate, in addition to the chairman of the Board of Directors, one or more directors to constitute an executive committee, who shall serve during the pleasure of the Board of Directors. The executive committee, to the extent provided in such resolution and permitted by law, shall have and may exercise all of the authority of the Board of Directors. Section 2. Organization, Etc. - The executive committee may choose a chairman and secretary. The executive committee shall keep a record of its acts and proceedings and report the same from time to time to the Board of Directors. Section 3. Meetings. - Meetings of the executive committee may be called by any member of the committee. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each member of the committee, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Section 4. Quorum and Manner of Acting. - A majority of the executive committee shall constitute a quorum for transaction of business, and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the executive committee. The members of the executive committee shall act only as a committee, and the individual members shall have no powers as such. Section 5. Removal. - Any member of the executive committee may be removed, with or without cause, at any time, by the Board of Directors. Section 6. Vacancies. - Any vacancy in the executive committee shall be filled by the Board of Directors. -8- ARTICLE IV Officers Section 1. Number. - The officers of the Corporation shall be a chairman of the Board of Directors, a deputy chairman of the Board of Directors (if elected by the Board of Directors), a president (if elected by the Board of Directors), one or more vice chairmen of the Board of Directors (if elected by the Board of Directors), a chief operating officer (if elected by the Board of Directors), one or more vice presidents (one or more of whom may be designated executive vice president or senior vice president), a treasurer, a controller, a secretary, one or more assistant treasurers, assistant controllers and assistant secretaries and such other officers as may from time to time be chosen by the Board of Directors. Any two or more offices may be held by the same person. Section 2. Election, Term of Office and Qualifications. - All officers of the Corporation shall be chosen annually by the Board of Directors, and each officer shall hold office until a successor shall have been duly chosen and qualified or until the officer resigns or is removed in the manner hereinafter provided. The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) and the vice chairmen of the Board of Directors (if any) shall be chosen from among the directors. Section 3. Vacancies. - If any vacancy shall occur among the officers of the Corporation, such vacancy shall be filled by the Board of Directors. Section 4. Other Officers, Agents and Employees - Their Powers and Duties. - The Board of Directors may from time to time appoint such other officers as the Board of Directors may deem necessary, to hold office for such time as may be designated by it or during its pleasure, and the Board of Directors or the chairman of the Board of Directors may appoint, from time to time, such agents and employees of the Corporation as may be deemed proper, and may authorize any officers to appoint and remove agents and employees. The Board of Directors or the chairman of the Board of Directors may from time to time prescribe the powers and duties of such other officers, agents and employees of the Corporation. Section 5. Removal. - Any officer, agent or employee of the Corporation may be removed, either with or without cause, by a vote of a majority of the Board of Directors or, in the case of any agent or employee not appointed by the Board of Directors, by a superior officer upon whom such power of removal may be conferred by the Board of Directors or the chairman of the Board of Directors. -9- Section 6. Chairman of the Board of Directors and Chief Executive Officer. - The chairman of the Board of Directors shall preside at meetings of the stockholders and of the Board of Directors and shall be a member of the executive committee. The chairman shall be the Chief Executive Officer of the Corporation and shall be responsible to the Board of Directors. He or she shall be responsible for the general management and control of the business and affairs of the Corporation and shall see to it that all orders and resolutions of the Board of Directors are implemented. The chairman shall from, time to time, report to the Board of Directors on matters within his or her knowledge which the interests of the Corporation may require be brought to its notice. The chairman shall do and perform such other duties as from time to time the Board of Directors may prescribe. Section 7. Deputy Chairman of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The deputy chairman shall be responsible to the chairman of the Board of Directors and shall perform such duties as shall be assigned to him or her by the chairman of the Board of Directors. The deputy chairman shall from time to time report to the chairman of the Board of Directors on matters within the deputy chairman's knowledge which the interests of the Corporation may require be brought to the chairman's notice. Section 8. President. - In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The president shall be responsible to the chairman of the Board of Directors. Subject to the authority of the chairman of the Board of Directors, the president shall be devoted to the Corporation's business and affairs under the basic policies set by the Board of Directors and the chairman of the Board of Directors. He or she shall from, time to time, report to the chairman of the Board of Directors on matters within the president's knowledge which the interests of the Corporation may require be brought to the chairman's notice. In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if any) shall, except as otherwise directed by the Board of Directors, have all of the powers and the duties of the chairman of the Board of Directors. The president (if any) shall do and perform such other duties as from time to time the Board of Directors or the chairman of the Board of Directors may prescribe. Section 9. Vice Chairmen of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), the vice chairman of the Board of Directors designated for such purpose by the chairman of the Board of Directors (if any) shall preside at meetings of the stockholders and of the Board of Directors. Each vice chairman of the -10- Board of Directors shall be responsible to the chairman of the Board of Directors. Each vice chairman of the Board of Directors shall from time to time report to the chairman of the Board of Directors on matters within the vice chairman's knowledge which the interests of the Corporation may require be brought to the chairman's notice. In the absence or inability to act of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), such vice chairman of the Board of Directors as the chairman of the Board of Directors may designate for the purpose shall have the powers and discharge the duties of the chairman of the Board of Directors. In the event of the failure or inability of the chairman of the Board of Directors to so designate a vice chairman of the Board of Directors, the Board of Directors may designate a vice chairman of the Board of Directors who shall have the powers and discharge the duties of the chairman of the Board of Directors. Section 10. Chief Operating Officer. - The chief operating officer (if any) shall be responsible to the Chairman of the Board of Directors for the principal operating businesses of the Corporation and shall perform those duties that may from time to time be assigned. Section 11. Vice Presidents. - The vice presidents of the Corporation shall assist the chairman of the Board of Directors, the deputy chairman of the Board of Directors, the president (if any) and the vice chairmen (if any) of the Board of Directors in carrying out their respective duties and shall perform those duties which may from time to time be assigned to them. The chief financial officer shall be a vice president of the Corporation (or more senior) and shall be responsible for the management and supervision of the financial affairs of the Corporation. Section 12. Treasurer. - The treasurer shall have charge of the funds, securities, receipts and disbursements of the Corporation. He or she shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as the Board of Directors may from time to time designate. The treasurer shall render to the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), the vice chairmen of the Board of Directors (if any), and the chief financial officer, whenever required by any of them, an account of all of his transactions as treasurer. If required, the treasurer shall give a bond in such sum as the Board of Directors may designate, conditioned upon the faithful performance of the duties of the treasurer's office and the restoration to the Corporation at the expiration of his or her term of office or in case of death, resignation or removal from office, of all books, papers, vouchers, money or other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. The treasurer shall perform such other duties as from time to time may be assigned to him or her. -11- Section 13. Assistant Treasurers. - In the absence or disability of the treasurer, one or more assistant treasurers shall perform all the duties of the treasurer and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the treasurer. Assistant treasurers shall also perform such other duties as from time to time may be assigned to them. Section 14. Secretary. - The secretary shall keep the minutes of all meetings of the stockholders and of the Board of Directors in a book or books kept for that purpose. He or she shall keep in safe custody the seal of the Corporation, and shall affix such seal to any instrument requiring it. The secretary shall have charge of such books and papers as the Board of Directors may direct. He or she shall attend to the giving and serving of all notices of the Corporation and shall also have such other powers and perform such other duties as pertain to the secretary's office, or as the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) or any vice chairman of the Board of Directors may from time to time prescribe. Section 15. Assistant Secretaries. - In the absence or disability of the secretary, one or more assistant secretaries shall perform all of the duties of the secretary and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the secretary. Assistant secretaries shall also perform such other duties as from time to time may be assigned to them. Section 16. Controller. - The controller shall be administrative head of the controller's department. He or she shall be in charge of all functions relating to accounting and the preparation and analysis of budgets and statistical reports and shall establish, through appropriate channels, recording and reporting procedures and standards pertaining to such matters. The controller shall report to the chief financial officer and shall aid in developing internal corporate policies whereby the business of the Corporation shall be conducted with the maximum safety, efficiency and economy. The controller shall be available to all departments of the Corporation for advice and guidance in the interpretation and application of policies that are within the scope of his or her authority. The controller shall perform such other duties as from time to time may be assigned to him or her. Section 17. Assistant Controllers. - In the absence or disability of the controller, one or more assistant controllers shall perform all of the duties of the controller and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the controller. Assistant controllers shall also perform such other duties as from time to time may be assigned to them. -12- ARTICLE V Contracts, Checks, Drafts, Bank Accounts, Etc. Section 1. Contracts. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the chairman of the Board of Directors may authorize shall have the power to execute any contract or other instrument on behalf of the Corporation; no other officer, agent or employee shall, unless otherwise in these By-Laws provided, have any power or authority to bind the Corporation by any contract or acknowledgement, or pledge its credit or render it liable pecuniarily for any purpose or to any amount. Section 2. Loans. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the Board of Directors may authorize shall have the power to effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any corporation, firm or individual, and for such loans and advances may make, execute and deliver promissory notes or other evidences of indebtedness of the Corporation, and, as security for the payment of any and all loans, advances, indebtedness and liability of the Corporation, may pledge, hypothecate or transfer any and all stocks, securities and other personal property at any time held by the Corporation, and to that end endorse, assign and deliver the same. Section 3. Voting of Stock Held. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president or the secretary may from time to time appoint an attorney or attorneys or agent or agents of the Corporation to cast the votes that the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose stock or securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing to any action by any other such corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the Corporation such written proxies, consents, waivers or other instruments as such officer may deem necessary or proper in the premises; or the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president or the secretary may attend in person any meeting of the holders of stock or other securities of such other corporation and thereat vote or exercise any and all powers of the Corporation as the holder of such stock or other securities of such other corporation. -13- ARTICLE VI Certificates Representing Shares Certificates representing shares of the Corporation shall be signed by the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), or the vice chairman of the Board of Directors (if any), or the president of the Corporation (if any) and the secretary or an assistant secretary. Any and all signatures on such certificates, including signatures of officers, transfer agents and registrars, may be facsimile. ARTICLE VII Dividends The Board of Directors may declare dividends from funds of the Corporation legally available therefor. ARTICLE VIII Seal The Board of Directors shall provide a suitable seal or seals, which shall be in the form of a circle, and shall bear around the circumference the words "Philip Morris Companies Inc." and in the center the word and figures "Virginia, 1985." ARTICLE IX Fiscal Year The fiscal year of the Corporation shall be the calendar year. -14- ARTICLE X Amendment The power to alter, amend or repeal the By-Laws of the Corporation or to adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by the Board of Directors may be repealed or changed by the stockholders, or new By-Laws may be adopted by the stockholders, and the stockholders may prescribe that any By-Laws made by them shall not be altered, amended or repealed by the directors. ARTICLE XI Emergency By-Laws If a quorum of the Board of Directors cannot be readily assembled because of some catastrophic event, and only in such event, these By-Laws shall, without further action by the Board of Directors, be deemed to have been amended for the duration of such emergency, as follows: Section 1. Section 6 of Article II shall read as follows: Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the directors present at a meeting of the Board of Directors called in accordance with these By-Laws. Section 2. The first sentence of Section 10 of Article II shall read as follows: Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors or a deputy chairman (if any), or of the president (if any) or any vice chairman of the Board of Directors (if any) or any director or of any person having the powers and duties of the chairman of the Board of Directors, the deputy chairman, the president or any vice chairman of the Board of Directors. Section 3. Section 12 of Article II shall read as follows: The directors present at any regular or special meeting called in accordance with these By-Laws shall constitute a quorum for the transaction of business at such meeting, and the action of a majority of such directors shall be the act of the Board of Directors, provided, however, that in the event that only one director is present at any such meeting no action except the election of directors shall be taken until at least two additional directors have been elected and are in attendance. -15- EX-12 4 ex12.txt EXHIBIT 12 EXHIBIT 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (in millions of dollars) -----------------
Three Months Ended March 31, 2002 -------------- Earnings before income taxes and minority interest $3,878 Add (deduct): Equity in net earnings of less than 50% owned affiliates (56) Dividends from less than 50% owned affiliates 22 Fixed charges 400 Interest capitalized, net of amortization 3 ------ Earnings available for fixed charges $4,247 ====== Fixed charges: Interest incurred: Consumer products $ 331 Financial services 24 ------ 355 Portion of rent expense deemed to represent interest factor 45 ------ Fixed charges $ 400 ====== Ratio of earnings to fixed charges 10.6 ======
EXHIBIT 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (in millions of dollars) -----------------
For the Years Ended December 31, ---------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Earnings before income taxes, minority interest and cumulative effect of accounting change $14,284 $14,087 $12,821 $ 9,215 $10,698 Add (deduct): Equity in net earnings of less than 50% owned affiliates (228) (228) (197) (195) (207) Dividends from less than 50% owned affiliates 29 70 56 70 138 Fixed charges 1,945 1,348 1,363 1,386 1,438 Interest capitalized, net of amortization 10 7 (2) (5) (16) ------- ------- ------- ------- ------- Earnings available for fixed charges $16,040 $15,284 $14,041 $10,471 $12,051 ======= ======= ======= ======= ======= Fixed charges: Interest incurred: Consumer products $ 1,665 $ 1,087 $ 1,118 $ 1,166 $ 1,224 Financial services 102 114 89 77 67 ------- ------- ------- ------- ------- 1,767 1,201 1,207 1,243 1,291 Portion of rent expense deemed to represent interest factor 178 147 156 143 147 ------- ------- ------- ------- ------- Fixed charges $ 1,945 $ 1,348 $ 1,363 $ 1,386 $ 1,438 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 8.2 11.3 10.3 7.6 8.4 ======= ======= ======= ======= =======
EX-99 5 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS As described in Note 7. Contingencies of this Report on Form 10-Q, there are legal proceedings covering a wide range of matters pending in various U.S. and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and PMI, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms "Lights" and "Ultra Lights" constitute deceptive and unfair trade practices, suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and various antitrust suits. Governmental plaintiffs in the health care cost recovery actions include the federal government, various cities and counties in the United States and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds ("unions"), Native American tribes, insurers and self-insurers, taxpayers and others. The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developments in these cases since March 19, 2002 are also described. SMOKING AND HEALTH LITIGATION The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates, including PMI, as of May 1, 2002, and describes certain developments in these cases since March 19, 2002. Consolidated Individual Smoking and Health Cases - ------------------------------------------------ In Re Tobacco Litigation (Individual Personal Injury cases), Circuit Court, Ohio County, West Virginia, consolidated January 11, 2000. In West Virginia, all smoking and health cases alleging personal injury have been transferred to the State's Mass Litigation Panel. The transferred cases include individual cases and putative class actions. All pending individual cases as well as cases filed in or transferred to the court by September 8, 2000 are to be included in a single consolidated trial. Approximately 1,250 individual cases have been filed. The trial court's order provides for the trial to be conducted in two phases. The issues to be tried in phase one are "general liability issues common to all defendants including, if appropriate, defective product theory, negligence theory, warranty theory; and any other theories supported by pretrial development" as well as entitlement to punitive damages and a punitive damages multiplier. Pursuant to the court's order, the individual claims of the plaintiffs whose cases have been consolidated will be tried on an individual basis or "in reasonably sized trial groups" during the second phase of the trial. Trial is scheduled to begin in September 2002. Flight Attendant Litigation - --------------------------- The settlement agreement entered into in the case of Broin, et al. v. Philip Morris Companies Inc., et al., permitted members of the purported class to bring individual suits as to their alleged injuries. As of May 1, 2001, approximately 2,825 of these suits were pending in the Circuit Court of Dade County, Florida against PM Inc. and three other cigarette manufacturers. In October 2000, the court held that the flight attendants will not be required to prove the substantive liability elements of their claims for negligence, strict liability and breach of implied warranty in order to recover damages, if any, other than establishing that the plaintiffs' alleged injuries 1 Exhibit 99.1 were caused by their exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded. In October 2001, the appellate court dismissed defendants' appeal of the trial court's ruling and, defendants have appealed to the Florida Supreme Court. To date, an estimated 12 such cases are scheduled for trial during 2002. Domestic Class Actions - ---------------------- Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 5, 1994. See Note 7. Contingencies for a discussion of this case. Norton, et al. v. RJR Nabisco Holdings Corporation, et al., Superior Court, Madison County, Indiana, filed May 3, 1996. Scott, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed May 24, 1996. The court granted plaintiffs' motion for class certification on behalf of Louisiana cigarette smokers seeking the creation of funds to pay the costs of monitoring the medical conditions of members of the purported class and providing them with smoking cessation programs. In May 2001, the trial court issued a trial plan that calls for adjudication of defendants' liability to the entire class based solely on evidence of the two class representatives and defendants appealed to the intermediate appellate court and the Louisiana Supreme Court seeking to vacate the trial plan. In June 2001, the appeals were denied. Trial of the case began in June 2001. Defendants filed writs challenging the trial court's jury selection procedures with the intermediate appellate court and the Louisiana Supreme Court, which were granted in part. In December 2001, defendants again filed writs with the intermediate appellate court asserting that there were errors in the jury selection. The writs were granted in part and jury selection has been reopened. In March 2002, the Louisiana Supreme Court granted defendants' application for a supervisory writ and struck four jurors from the panel due to possible bias. Connor, et al. v. The American Tobacco Company, et al., Second Judicial District Court, Bernalillo County, New Mexico, filed October 10, 1996. In April 2002, the court entered the parties' stipulation of dismissal with prejudice. In Re: Tobacco Litigation (Medical Monitoring cases) (formerly McCune, et al. v. The American Tobacco Company, et al.), Circuit Court, Kanawha County, West Virginia, filed January 31, 1997. In November 2001, the jury returned a verdict in favor of all defendants. In January 2002, the court denied plaintiffs' motion for a new trial. Muncie (formerly Ingle and formerly Woods), et al. v. Philip Morris Incorporated, et al., Circuit Court, McDowell County, West Virginia, filed February 4, 1997. Cole, et al. v. The Tobacco Institute, Inc., et al., United States District Court, Eastern District, Texarkana Division, Texas, filed May 5, 1997. In December 2001, the United States Court of Appeals for the Fifth Circuit affirmed the trial court's May 2000 dismissal of the case. Anderson, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Eastern District, Tennessee, filed May 23, 1997. 2 Exhibit 99.1 Mahoney (formerly Fitz), et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Southern District, Iowa, filed June 20, 1997. In October 2001, the court denied plaintiffs' motion for class certification. In November 2001, the United States Court of Appeals for the Eighth Circuit denied plaintiffs' motion for leave to appeal. Badillo, et al. v. The American Tobacco Company, et al., United States District Court, Nevada, filed October 8,1997. In July 2001, the court denied plaintiffs' motion for class certification, and plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. In April 2002, the Ninth Circuit denied plaintiffs' petition for leave to appeal. Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997. Jackson, et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, Utah, filed February 13, 1998. Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998. Christensen, et al. v. Philip Morris Companies Inc., et al., United States District Court, Nevada, filed April 3, 1998. In July 2001, the court denied plaintiffs' motion for class certification, and plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit. In April 2002, the Ninth Circuit denied plaintiffs' petition for leave to appeal. Cleary, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed June 3, 1998. Creekmore, et al. v. Brown & Williamson, et al., Superior Court, Buncombe County, North Carolina, filed July 31, 1998. In February 2002, plaintiffs moved to have the case dismissed without prejudice. Jimenez, et al. v. Brown & Williamson Tobacco Corporation, et al., Second Judicial District Court, County of Bernalillo, New Mexico, filed August 20, 1998. In April 2002, the court entered the parties' stipulation of dismissal with prejudice. Cypret (formerly Jones), et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filed December 22, 1998. Simon, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 9, 1999. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) In November 2000, the court denied plaintiffs' motion for class certification, but indicated its intent to certify a class in Simon, et al., v. Philip Morris Incorporated, et al. (Simon II). Julian, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Montgomery County, Alabama, filed April 14, 1999. 3 Exhibit 99.1 Decie, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed April 21, 2000. In September 2000, a putative class action was filed which purports to consolidate punitive damage claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) Ebert, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed August 9, 2000 (not yet served). In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) Vandermeulen, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed September 18, 2000. Sims, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed May 23, 2001. Johnson, et al. v. Newport Lorillard, et al., United States District Court, Southern District, New York, filed October 31, 2001. Lowe, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Oregon, filed November 19, 2001. Trivisonno, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, Ohio, filed January 14, 2002. International Class Actions - --------------------------- Caputo (formerly LeTourneau) v. Imperial Tobacco Limited, et al., Ontario Court of Justice, Toronto, Canada, filed January 13, 1995. The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of Sao Paulo, Brazil, filed July 25, 1995. Anacont-Associacao Nacional de Assistencia ao Consumidor e Trebalhador v. Souza Cruz S.A., et al., State Bankruptcy Court, Rio de Janiero, Brazil, filed March 10, 1998. During 2000, the court dismissed the action, and plaintiff has appealed. Fortin, et al. v. Imperial Tobacco Ltd., et al., Quebec Superior Court, Canada, filed on or about September 11, 1998. Conseil Quebecois sur le Tabac v. RJR-Macdonald Inc., et al., Quebec Superior Court, Canada, filed November 20, 1998. Yabin Galidi, et al. v. Dubek Ltd., et al., Tel Aviv-Yaffo Region Court, Israel, filed July 12, 1999. In March 2002, the case was dismissed. Ragoonanan, et al. v. Imperial Tobacco Limited, et al., Superior Court of Justice, Ontario, Canada, filed January 11, 2000. Yas'ur, et al. v. Dubek Ltd., et al., Tel Aviv-District Court, Israel, filed November 22, 2000. The Company's 4 Exhibit 99.1 affiliates have been struck from the action. Asociacion Espanola de Laringectomizados y Multiados de la voz v. Altadis S.A., et al., Court of First Instance, Barcelona, Spain, filed January 3, 2001. In April 2002, the court dismissed the case, and plaintiffs have appealed. Asociacion Vallisoletana de Laringectomizados v. Altadis S.A., et al., Court of First Instance, Valadolid, Spain, filed January 4, 2001. In February 2002, the case was dismissed and plaintiff has appealed. Asociacion Viscaina de Laringectomizados v. Altadis S.A., et al., Court of First Instance, Bilbao, Spain, filed January 5, 2001. Asociacion de Laringectomizados de Leon v. Altadis S.A., et al., Court of First Instance, Leon, Spain, filed January 3, 2001. HEALTH CARE COST RECOVERY LITIGATION The following lists the health care cost recovery actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates as of May 1, 2002, and describes certain developments in these cases since March 19, 2002. As discussed in Note 7. Contingencies in 1998 PM Inc. and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the "MSA") settling the health care cost recovery claims of 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas. Settlement agreements settling similar claims had previously been entered into with the states of Mississippi, Florida, Texas and Minnesota. The Company believes that the claims in the city/county, taxpayer and certain of the other health care cost recovery actions listed below are released in whole or in part by the MSA or that recovery in any such actions should be subject to the offset provisions of the MSA. City/County Cases - ----------------- County of Cook v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed April 18, 1997. In September 1999, the judge granted in part and denied in part defendants' motion to dismiss the complaint. In August 2001, the trial court granted defendants' motion for judgment on the pleadings and dismissed the case in its entirety, and plaintiffs have appealed. City of St. Louis, et al. v. American Tobacco, et al., Circuit Court, City of St. Louis, Missouri, filed November 23, 1998. In November 2001, the court granted in part and denied in part defendants' motion to dismiss and dismissed three of plaintiffs' 11 claims. County of St. Louis v. American Tobacco, et al., Circuit Court, City of St. Louis, Missouri, filed December 3, 1998. The case is currently stayed. County of Wayne v. Philip Morris Incorporated, et al., United States District Court, Eastern District, Michigan, filed December 7, 1999. In August 2000, following arguments on defendants' motion for judgment on the pleadings, the district court certified certain state law questions to the Michigan Supreme Court. In January 2002, the Michigan Supreme Court ruled that the Michigan Attorney General has the authority to release the claims of counties and other subdivisions in matters of state interest. In April 2002, the parties submitted a stipulation of dismissal of the case to the court. County of McHenry, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed July 13, 2000. The case has been stayed pending the outcome of the appeal in County of Cook v. Philip Morris Incorporated, et al., discussed above. 5 Exhibit 99.1 Department of Justice Case - -------------------------- The United States of America v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed September 22, 1999. See Note 7. Contingencies, for a discussion of this case. International Cases - ------------------- Republic of the Marshall Islands v. The American Tobacco Company, et al., High Court, Republic of the Marshall Islands, filed October 20, 1997. In June 2001, the court entered a final judgment reflecting the parties' stipulation of dismissal, and plaintiff has appealed the trial court's February 2001 ruling that dismissed most of plaintiff's claims. In May 2002, the Supreme Court of the Marshall Islands affirmed the trial court's ruling dismissing the case. The Republic of Panama v. The American Tobacco Company, Inc., United States District Court, District of Columbia, filed September 11, 1998. In July 2000, the United States Court of Appeals for the Fifth Circuit vacated the ruling by the United States District Court for the Eastern District of Louisiana that granted plaintiff's motion to remand the case to the Civil District Court, Orleans Parish, Louisiana. In November 2000, the case was transferred to the Multidistrict Litigation Proceeding pending before the United States District Court for the District of Columbia (see In re Tobacco/Government Health Care Cost Litigation (MDL No. 1279) (the "MDL Proceeding," discussed below)). Kupat Holim Clalit v. Philip Morris Incorporated, et al., Jerusalem District Court, Israel, filed September 28, 1998. The Republic of Bolivia v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 20, 1999. In February 1999, this case was removed to federal court by defendants and subsequently transferred on the court's own motion to the federal district court for the District of Columbia in March 1999. It is currently pending in the MDL Proceeding discussed below. The Republic of Venezuela v. Philip Morris Companies Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed January 27, 1999. This case was removed to federal court by defendants in February 1999 and subsequently transferred to the MDL Proceeding discussed below. The court hearing the MDL Proceeding remanded the case to Florida state court in June 2000, and defendants appealed to the United States Court of Appeals for the District of Columbia Circuit. In April 2002, the appellate court held that it lacked jurisdiction to review the remand order. In November 2001, the Florida court dismissed the case, and plaintiff has appealed. The Caisse Primaire d'Assurance Maladie of Saint-Nazaires v. SEITA, et al., Civil Court of Saint-Nazaires, France, filed June 1999. In re Tobacco/Governmental Health Care Costs Litigation (MDL No. 1279), United States District Court, District of Columbia, consolidated June 1999. In June 1999, the United States Judicial Panel on Multidistrict Litigation transferred foreign government health care cost recovery actions brought by Nicaragua, Venezuela, and Thailand to the District of Columbia for coordinated pretrial proceedings with two such actions brought by Bolivia and Guatemala already pending in that court. Subsequently, the resulting proceeding has also included filed cases brought by the following foreign governments: Ukraine; the Brazilian States of Espirito Santo, Goias, Mato Grosso do Sul, Para, Parana, Pernambuco, Piaui, Rondonia, Sao Paulo and Tocantins; Panama; the Province of Ontario, Canada; Ecuador; the Russian Federation; Honduras; Tajikistan; Belize; the Kyrgyz Republic and 11 Brazilian cities. The cases brought by Thailand and the Kyrgyz Republic have been voluntarily dismissed. The district court dismissed the complaints filed by Guatemala, Nicaragua, Ukraine and the Province of Ontario, and plaintiffs appealed. In May 2001, the United States Court of Appeals for the District of Columbia Circuit affirmed the dismissal of the complaints filed by Guatemala, Nicaragua and Ukraine. In October 2001, the United States Supreme Court refused to consider further appeals in these three cases. In 6 Exhibit 99.1 November 2001, the Province of Ontario voluntarily dismissed its appeal. The district court remanded the Venezuela, Goias, Ecuador and Espirito Santo actions to Florida state court, and defendants appealed to the United States Court of Appeals for the District of Columbia Circuit. In April 2002, the appellate court held that it lacked jurisdiction to review the remand order. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the Venezuela and Espirito Santo actions were dismissed, and Venezuela has appealed. The State of Rio de Janeiro of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., District Court, Angelina County, Texas, filed July 12, 1999. The State of Goias of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 18, 1999. This case was removed to federal court by defendants in November 1999 and subsequently transferred to the MDL Proceeding discussed above. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants appealed to the United States Court of Appeals for the District of Columbia Circuit. In April 2002, the appellate court held that it lacked jurisdiction to review the remand order. The State of Sao Paulo of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Civil District Court, Orleans Parish, Louisiana, filed February 9, 2000. In May 2001, the United States Court of Appeals for the Fifth Circuit vacated the district court's May 2000 ruling that granted plaintiffs' motion to remand the case to state court. Plaintiff's petition for rehearing was denied in September 2001. In April 2002, the United States Supreme Court granted plaintiff's petition for a writ of certiorari and reversed the Fifth Circuit's ruling. The State of Espirito Santo of the Federal Republic of Brazil v. Brooke Group, et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed February 20, 2000. This case was removed to federal court by defendants in April 2000 and subsequently transferred to the MDL Proceeding discussed above. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants appealed to the United States Court of Appeals for the District of Columbia Circuit. In April 2002, the appellate court held that it lacked jurisdiction to review the remand order. In November 2001, the Florida court dismissed the case. The State of Mato Grosso do Sul, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed July 19, 2000. In August 2000, this case was removed to federal court by defendants, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The Russian Federation v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed on August 25, 2000. In September 2000, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The Republic of Honduras v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed October 5, 2000. In October 2000, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The State of Tocantins, Brazil v. The Brooke Group Ltd. Inc., et al., United States District Court, District of Columbia, filed October 24, 2000. In November 2000, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The State of Piaui, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed December 13, 2000. In January 2001, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. 7 Exhibit 99.1 The Republic of Tajikistan v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 22, 2001. In February 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001. The Republic of Belize v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed April 5, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Belford Roxo, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Belo Horizonte, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Caripicuiba, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Duque de Caxias, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Joao Pessoa, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Jundiai, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Mage, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Nilopolis-RJ, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Nova Iguacu, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Rio de Janiero, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of San Bernardo de Campo, Brazil v. Philip Morris Companies Inc., et al., United States District Court, 8 Exhibit 99.1 District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. State of Para, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. State of Parana, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. State of Rondonia, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. State of Pernambuco, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed December 28, 2001. In January 2002, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. Junta de Andalucia v. Philip Morris Spain, et al., Court of First Instance, Madrid, Spain, filed February 21, 2002. Union Cases - ----------- Central Illinois Carpenters Health and Welfare Trust Fund, et al. v. Philip Morris Incorporated, et al., Circuit Court, Third Judicial Circuit, Madison County, Illinois, filed May 30, 1997. In April 2002, plaintiffs voluntarily dismissed the case without prejudice. Eastern States Health and Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed July 28, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal. Operating Engineers Local 12 Health and Welfare Trust Fund, et al. v. American Tobacco, Inc., et al., Superior Court, San Diego County, California, filed September 17, 1997. In March 2000, the court ruled that plaintiffs are not permitted to use California's unfair business practices statute to seek monetary damages for their claims. In April 2000, the plaintiffs voluntarily dismissed the remaining claims with prejudice and appealed certain trial court rulings to the state court of appeals. In October 2001, the California Court of Appeals affirmed the trial court's ruling. Plaintiffs appealed to the California Supreme Court, which has granted review but deferred further action pending disposition of related issues in another case. Puerto Rican ILGWU Health & Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, County of New York, New York, filed September 17, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal. IBEW Local 25 Health and Benefit Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. IBEW Local 363 Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 138, 138A and 138B International Union of Operating Engineers Welfare Fund v. Philip Morris 9 Exhibit 99.1 Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 840, International Brotherhood of Teamsters Health and Insurance Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Long Island Regional Council of Carpenters Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 1199 Home Care Industry Benefit Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 1199 National Benefit Fund for Health and Human Services Employees v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed February 27, 1998. The named plaintiffs in this case are eight union trust funds. The district court denied plaintiffs' motion for class certification in September 2000. In October 2000, the plaintiffs petitioned the United States Court of Appeals for the Second Circuit for review of that order. The Second Circuit has not yet announced whether it will accept plaintiffs' petition for review. The district court has also ruled that plaintiffs may proceed to trial with the claims of only one union trust fund, which must be a New York based fund. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) The district court has granted plaintiffs' motion to include their claims in Simon II and stayed this case pending the resolution of Simon II. In July 2001, the court further stayed this case pending resolution of the appeal in Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., discussed below. Bergeron, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 29, 1999. In June 2000, the court denied defendants' motion to dismiss the case. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) In July 2001, the court stayed this case pending resolution of the appeal in Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., discussed below. Construction Laborers of Greater St. Louis Health and Welfare Fund, et al. v. Philip Morris Incorporated, et. al., Circuit Court, St. Louis County, Missouri, filed January 19, 2001. In March 2002, plaintiffs voluntarily dismissed the case without prejudice. Native American Cases - --------------------- Sisseton-Wahpeton Sioux Tribe v. Philip Morris Incorporated, et al., Tribal Court of the Sisseton-Wahpeton Sioux Tribe, filed May 8, 1998. On December 1, 1999, the appellate court granted the parties' petitions for interlocutory appeal from the trial court's order that granted in part and denied in part defendants' motion to dismiss the complaint. The trial and appellate courts subsequently stayed proceedings in this case until there 10 Exhibit 99.1 was a ruling on defendants' dismissal motion in Acoma Pueblo, et al. v. American Tobacco Company Co., et al. (discussed below). After the Acoma case was dismissed in July 2001, plaintiff indicated that it would consider a voluntary dismissal without prejudice of the case, but to date has not filed such a motion nor taken steps to prosecute the case further. Acoma Pueblo, et al. v. American Tobacco Co., et al., United States District Court, New Mexico, filed June 16, 1999. In July 2001, the court granted defendant's motion to dismiss the case without prejudice. In September 2001, plaintiff moved for reconsideration of the court's order, which was denied in November 2001. Navajo Nation v. Philip Morris Incorporated, et al., District Court, Window Rock, Arizona, filed August 11, 1999. In January 2002, the court granted in part defendants motion to dismiss the case and dismissed all of plaintiff's claims, except one, and plaintiff has moved for reconsideration. The Alabama Coushatta Tribe of Texas v. American Tobacco Co., et al., United States District Court, Eastern District, Texas, filed August 30, 2000. In August 2001, the court granted defendants' motion to dismiss the complaint, and plaintiff has appealed. Insurer and Self-Insurer Cases - ------------------------------ Group Health Plan, et al. v. Philip Morris Incorporated, et al., United States District Court, Minnesota, filed March 11, 1998. In January 2002, the court granted defendants' motion for summary judgment dismissing the case, and plaintiffs have appealed. In April 2002, plaintiff-appellants moved to certify certain questions of law to the Minnesota Supreme Court. Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 29, 1998. In September 2000, the court severed the claims of one plaintiff, Empire Blue Cross and Blue Shield ("Empire"), from those of the other plaintiffs. Trial of Empire's claims commenced March 2001, and in June 2001, the jury returned a verdict in favor of Empire on two of its claims and awarded Empire up to approximately $17.8 million in compensatory damages, including $6.8 million against PM Inc., and no punitive damages. In July 2001, the court stayed the remaining Blue Cross plans' cases pending the outcome of Empire's appeal, and denied plaintiff's motion to treble the damage award. In October 2001, the court denied defendants' post-trial motions challenging the verdict, and in November 2001, entered judgment. In February 2002, the court awarded plaintiff approximately $38 million for attorneys' fees. PM Inc. has appealed. Betriebskrankenkasse Aktiv, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 28, 2000. In February 2002, upon the stipulation of the parties, the case was dismissed without prejudice subject to plaintiffs being able to refile the case in the event the Blue Cross and Blue Shield case discussed above is ultimately resolved in favor of plaintiffs in that case. Taxpayer Cases - -------------- Temple, et al. v. The State of Tennessee, et al., United States District Court, Middle District, Tennessee, filed 11 Exhibit 99.1 September 11, 2000. Plaintiffs' complaint seeks class certification of those individuals who are Medicaid/TennCare recipients who have allegedly suffered from smoking-related injuries. Plaintiffs claim that the MSA funds belong to individuals under Tennessee's "made wide" doctrine and they further seek a declaration that the MSA is unconstitutional. Plaintiffs have recently moved for leave to amend their complaint again. Defendants have moved to disqualify plaintiffs' counsel and have moved to dismiss the lawsuit for lack of prosecution. Plaintiffs have also filed a motion for a preliminary injunction seeking to enjoin the State of Tennessee from receiving the MSA payments and asking that the MSA proceeds be paid into the court. In March 2002, the motion was denied. Also in March 2002, the court granted the defendants' motion to stay the action pending resolution of an appeal before the United States Court of Appeals for the Sixth Circuit addressing an issue similar to one raised by the defendants in this case. Other Cases - ----------- Perry, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Tennessee, filed September 30, 1996. In April 2001, the court granted defendants' motion to dismiss the case, and plaintiffs have appealed. Mason, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed December 23, 1997. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) In March 2002, plaintiffs moved for class certification. A.O. Fox Memorial Hospital, et al. v. The American Tobacco Company, et al., Supreme Court, Nassau County, New York, filed March 30, 2000. In December 2001, the court dismissed the case for failure to state a claim. Plaintiffs have appealed. Rhymer v. Philip Morris Incorporated, United States District Court, Virgin Islands, Division of St. Thomas and St. John, filed February 5, 2002. CERTAIN OTHER TOBACCO-RELATED ACTIONS The following lists certain other tobacco-related litigation pending against the Company and/or various subsidiaries and others as of May 1, 2002, and describes certain developments since March 19, 2002. Lights/Ultra Lights Cases - ------------------------- Gesser (formerly Cummis), et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Middlesex County, New Jersey, filed July 9, 1998. McNamara, et al. v. Philip Morris Companies, Inc. and Philip Morris Incorporated, Court of Common Pleas, Montgomery County, Pennsylvania, filed July 16, 1998. In November 2001, plaintiffs voluntarily dismissed the case. Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filed November 24, 1998. In October 2001, the court granted plaintiffs' motion for class certification. McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court, Davidson County, Tennessee, filed January 19, 1999. Marrone, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Court of Common Pleas, Medina County, Ohio, filed November 8, 1999. 12 Exhibit 99.1 Miles, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Madison County, Illinois, filed February 10, 2000. Plaintiffs' motion for class certification was granted in February 2001. Trial is scheduled for January 2003. Ratliff (formerly Bauer), et al. v. Philip Morris Companies Inc., Circuit Court, City of St. Louis, Missouri, filed February 15, 2000. Hines, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filed February 23, 2001. In February 2002, the court granted plaintiffs' motion for class certification. Philipps, et al. v. Philip Morris Incorporated, et al., Court of Common Pleas, Medina County, Ohio, filed May 1, 2001. Moore, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, West Virginia, filed August 10, 2001. Curtis, et al. v. Philip Morris Companies Inc., et al., Fourth Judicial District Court, Hennepin County, Minnesota, filed November 28, 2001. Fischer, et al. v. Philip Morris Companies Inc., et al., Superior Court, Alameda County, Oakland, California, filed December 5, 2001. Tremblay, et al. v. Philip Morris Incorporated, Superior Court, Rockingham County, New Hampshire, filed March 29, 2002. Peters v. Philip Morris Incorporated, Superior Court, Rockingham County, New Hampshire, filed April 22, 2002. Cigarette Importation Cases - --------------------------- Department of Amazonas, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, New York, filed May 19, 2000. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. The Republic of Ecuador v. Philip Morris Incorporated, et al., United States District Court, Southern District, Florida, filed June 5, 2000. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. The Republic of Belize v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Florida, filed May 8, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. The Republic of Honduras v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Florida, filed May 8, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. The European Community, et al. v. RJR Nabisco, Inc., et al., United States District Court, Eastern District, New York, filed August 6, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. 13 Exhibit 99.1 Asbestos Contribution Cases - --------------------------- Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit Court, Fourth Judicial Circuit, Duval County, Florida, filed September 15, 1997. Raymark Industries, Inc. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Northern District, Atlanta Division, Georgia, filed September 15, 1997. Fibreboard Corporation, et al. v. The American Tobacco Company, et al., Superior Court, Alameda County, California, filed December 11, 1997. Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed December 19, 1997. Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit Court, Fourth Judicial Circuit, Duval County, Florida, filed December 31, 1997 (not yet served). Raymark Industries, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed January 30, 1998. In September 2000, a putative class action was filed in the United States District Court for the Eastern District of New York which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) In July 2001, the court stayed this case pending resolution of the appeal in Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., discussed above. Owens Corning v. R.J. Reynolds Tobacco Company, et al., Circuit Court, Fayette County, Mississippi, filed August 30, 1998. In July 2001, the court granted defendants' motion for summary judgment dismissing the claims of the asbestos company plaintiff, and plaintiff has appealed. UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed March 15, 1999. Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). Gasket Holdings, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). Kaiser Aluminum & Chemical Corporation, et al. v. RJR Nabisco, Inc. et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000. T&N, Ltd., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). Gasket Holdings, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Claiborne County, Mississippi, filed April 18, 2001 (not yet served). In April 2002, plaintiffs voluntarily dismissed the case without prejudice. W.R. Grace & Co. Conn., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed April 24, 2001 (not yet served). Retail Leaders Case - ------------------- R.J. Reynolds Tobacco Company, et al. v. Philip Morris Incorporated, United States District Court, Middle 14 Exhibit 99.1 District, North Carolina, filed March 12, 1999. In May 2002, the court granted PM Inc.'s motion for summary judgment and dismissed all of the claims with prejudice. Vending Machine Case - -------------------- Lewis d/b/a B&H Vendors v. Philip Morris Incorporated, United States District Court, Middle District, Tennessee, filed February 3, 1999. Tobacco Price Cases - ------------------- The following are putative class actions filed by tobacco wholesalers/distributors and by smokers, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. Buffalo Tobacco Products, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed February 8, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District, Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) DelSeronne, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed February 8, 2000. Plaintiffs' motion for class certification and defendants' motion for summary judgment are pending. Greer, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000. Lennon v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed February 9, 2000. In October 2001, the court granted defendants' motion to dismiss. Munoz, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco County, California, filed February 9, 2000. Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000. In November 2001, the court granted plaintiffs' motion for class certification. Gray, M.D., et al. v. Philip Morris Companies Inc., et al., Superior Court, Pima County, Arizona, filed February 11, 2000. In March 2001, the trial court dismissed the case, and plaintiffs have appealed. Brownstein, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Broward County, Florida, filed February 14, 2000. Morse v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 14, 2000. Ulan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 17, 2000. Williamson Oil Company, Inc. v. Philip Morris Companies, et al., United States District Court, Northern District, Georgia, filed February 18, 2000. Shafer v. Philip Morris Companies Inc., et al., District Court, Morton County, North Dakota, filed February 16, 2000. Sullivan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000. Teitler v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000. 15 Exhibit 99.1 Peirona v. Philip Morris Companies Inc., et al., Superior Court, San Francisco County, California, filed February 28, 2000. Cusatis v. Philip Morris Companies Inc., et al., Circuit Court, Milwaukee County, Wisconsin, filed February 28, 2000. Sand v. Philip Morris Companies Inc., et al., Superior Court, Los Angeles County, California, filed February 28, 2000. Amsterdam Tobacco Corp., et al. v. Philip Morris Companies et al., United States District Court, Northern District, Georgia, filed March 6, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case from United States District Court, District of Columbia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) Nierman v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 6, 2000. In October 2001, the court granted defendants' motion to dismiss. Sylvester v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 8, 2000. In October 2001, the court granted defendants' motion to dismiss. I. Goldschlack v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed March 9, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) Suwanee Swifty Stores, Inc., D.I.P. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 14, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) Holiday Markets, Inc., et al. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 17, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) Taylor, et al. v. Philip Morris Companies Inc., et al., Superior Court, Cumberland County, Maine, filed March 24, 2000. Romero, et al. v. Philip Morris Companies Inc., et al., First Judicial District Court, Rio Arriba County, New Mexico, filed April 10, 2000. Belch, et al. v. Philip Morris Companies Inc., et al., Superior Court, Alameda County, California, filed April 11, 2000. Belmonte, et al. v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed April 11, 2000. Aguayo, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed April 11, 2000. Swanson, et al. (formerly Vetter, et al.) v. Philip Morris Companies Inc., et al., District Court, Hughes County, South Dakota, filed April 18, 2000. Ludke, et al. v. Philip Morris Companies Inc., et al., District Court, Hennepin County, Minnesota, filed April 20, 2000. In November 2001, the court denied plaintiffs' motion for class certification. 16 Exhibit 99.1 Kissel, et al. (formerly Quickle, et al.) v. Philip Morris Companies Inc., et al., First Judicial Circuit Court, Ohio County, West Virginia, filed May 2, 2000. Hartz Foods, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed May 10, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia (See In Re: Cigarette Antitrust Litigation MDL No. 1342, discussed below.) Baker, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000. Campe, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000. Barnes v. Philip Morris Companies Inc., et al., Superior Court, District of Columbia, filed May 18, 2000. Lau, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 25, 2000. In Re: Cigarette Antitrust Litigation MDL No. 1342, Federal Multidistrict Litigation Panel, United States District Court, Northern District, Georgia, Atlanta Division, filed June 7, 2000. (Coordinated litigation of all federal cases.) Plaintiffs' motion for class certification was granted in January 2001. Defendants' motions for summary judgment are pending. Philips, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed June 9, 2000. Pooler/Unruh, et al. v. R.J. Reynolds, et al., Second Judicial District, Washoe County, Nevada, filed June 9, 2000. Saylor, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Washington County, Tennessee, filed August 15, 2001. Defendants' motion to dismiss the case is pending. Cases Under the California Business and Professions Code - -------------------------------------------------------- Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. In April 2001, the court granted in part plaintiffs' motion for class certification and certified a class comprised of residents of California who smoked at least one of defendants' cigarettes between June 1993 and April 2001 and who were exposed to defendants' marketing and advertising activities in California. Certification was granted as to plaintiffs' claims that defendants violated California Business and Professions Code Sections 17200 and 17500 pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code. Trial is scheduled for October 2002. Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San Diego County, California, filed April 2, 1998. In November 2000, the court granted the plaintiffs' motion for class certification on behalf of minor California residents who smoked at least one cigarette between April 1994 and December 1999. Certification was granted as to plaintiffs' claims that defendants violated California Business and Professions Code Section 17200 pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code. Trial is scheduled for July 2002. Tobacco Growers' Case - --------------------- DeLoach, et al. v. Philip Morris Incorporated, et al., United States District Court, Middle District, North Carolina, filed February 16, 2000. In April 2002, the court granted plaintiffs' motion for class certification, and defendants have appealed. MSA-Related Cases - ----------------- The following are cases in which plaintiffs have challenged the validity of the Master Settlement Agreement described in Note 7. Contingencies. Forces Action Project, LLC, et al. v. The State of California, et al., United States District Court, Northern District, California, filed January 23, 1999. In August 2001, the United States Court of Appeals for the Ninth Circuit affirmed the district court's dismissal of plaintiffs' claims based on lack of standing, and reversed the district court's denial of plaintiffs' motion for leave to file an amended complaint. In January 2002, the district court denied plaintiffs' new motion to amend the complaint, and plaintiffs have appealed. A.D. Bedell Company, Inc. v. Philip Morris Incorporated, et al., Supreme Court, Cattaraugus County, New York, filed October 18, 1999. In November 1999, the court denied a motion to dismiss the complaint and denied a motion to vacate the temporary restraining order enjoining Philip Morris from refusing to sell products to plaintiff. Defendant filed an appeal from the court's denial of the motion to dismiss and the motion to vacate. In May 2000, the appellate court granted in part and denied in part defendants' motion to dismiss the case. The case has been stayed pending resolution of A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al. 17 Exhibit 99.1 PTI, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, California, filed August 13, 1999. In May 2000, the court dismissed plaintiffs' claims. Star Scientific Inc. v. Mark E. Earley, United States District Court, Eastern District, Virginia, filed December 15, 2000. Plaintiff, a cigarette manufacturer, filed a suit against the Commonwealth of Virginia challenging the constitutionality of the MSA and the legislation enacted to enforce it. The Company was not named as a defendant in the suit. In March 2001, the district court entered a final order dismissing the case on the grounds that plaintiff lacked standing to assert the constitutional challenges to the MSA and that the challenge of the qualifying statute failed to state a claim upon which relief can be granted, and plaintiff has appealed. In January 2002, the United States Court of Appeals for the Fourth Circuit affirmed the district court's decision rejecting plaintiff's claims. Mariana, et al. v. William, et. al., United States District Court, Middle District, Pennsylvania, filed October 31, 2001. Plaintiffs, seeking to enjoin the Commonwealth of Pennsylvania's receipt of funds pursuant to the MSA, allege that enforcement of the MSA is unconstitutional and violates antitrust laws. Neel, et al. v. Strong, et al., Circuit Court, St. Louis County, Missouri, filed January 8, 2002. Plaintiffs, two Missouri residents and taxpayers, seek to enjoin the payment by PM Inc. and other tobacco companies of attorneys' fees to counsel who represented the State of Missouri in its health care cost recovery suit against the tobacco industry, and allege that the Missouri fee payment agreement violates certain provisions of the Missouri Constitution. Consolidated Putative Punitive Damages Cases - -------------------------------------------- Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), United States District Court, Eastern District, New York, filed September 6, 2000. In November 2000, the court indicated that it intends to certify a class in this action which purports to consolidate punitive damages claims in the following ten actions: Simon, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; Decie, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York; Ebert, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; Bergeron, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; Mason, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York; Robert A. Falise, et al. v. The American Tobacco Company, et al., United States District Court, Southern District, New York; H. K. Porter Company, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York; and Raymark Industries, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York. The court heard arguments on plaintiffs' motion for class certification in March 2001. In June 2001, the Falise case was dismissed. In July 2001, the H.K. Porter case was dismissed. CERTAIN OTHER ACTIONS The following lists certain other actions pending against subsidiaries of the Company and others as of November 1, 2001. National Cheese Exchange Cases - ------------------------------ Consolidated Action: (Servais, et al. v. Kraft Foods, Inc. and the National Cheese Exchange, Inc., Circuit Court, Dane County, Wisconsin, filed May 5, 1997; Dodson, et al. v. Kraft Foods, Inc., et al., Circuit Court, Dane County, Wisconsin, filed July 1, 1997; Noll, et al. v. Kraft Foods, Inc., et al., Circuit Court, Dane County, 18 Exhibit 99.1 Wisconsin, filed July 11, 1997). Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al., United States District Court, Central District, California, filed April 14, 1998. Environmental Matters - --------------------- In May 2001, the Attorney General for the State of Ohio notified Kraft Foods North America that it may be subject to an enforcement action for alleged violations of the state's water pollution control law at its production facility in Farmdale, Ohio. The Ohio Attorney General has alleged that this facility has exceeded its water permit effluent limits and violated its reporting requirements. The State has offered to attempt to negotiate a settlement of this matter, and Kraft Foods North America has accepted the offer to do so. The State has not yet identified the relief it may seek in this matter. 19 EX-99 6 ex99-2.txt EXHIBIT 99.2 Exhibit 99.2 TRIAL SCHEDULE FOR CERTAIN CASES Set forth below is a listing of smoking and health class actions and consolidated individual cases, currently scheduled for trial through 2002 against PM Inc. and, in some cases, the Company. Trial dates, however, are subject to change.
Case (Jurisdiction) Type of Action Trial Date - -------------------------------- ---------------------------- ---------------- Daniels, et al. v. Smoking and Health Class Action July 1, 2002 Philip Morris Companies Inc., et al. (California) In Re: Tobacco Litigation Consolidated Individual September 4, 2002 (Individual Personal Injury cases) Smoking and Health Cases (West Virginia) Brown, et al. v. The American Smoking and Health Class Action October 11, 2002 Tobacco Company, Inc., et al. (California)
1 Exhibit 99.2 Below is a schedule setting forth by month the number of individual smoking and health cases, including cases brought by current and former flight attendants claiming personal injuries allegedly related to ETS, against PM Inc. and, in some cases, the Company, that are currently scheduled for trial through the end of the year 2002. 2002 - ---------- May (6) June (7) July (2) August (2) September (5) October (2) November (3) December (3) 2 -----END PRIVACY-ENHANCED MESSAGE-----